Iron Man! Copper And Iron Futures Prices Decline As Global Growth Continues Slowing (Gold-Copper Ratio Similar To 10Y Treasury Yield)

Iron Man!

As a sign of continued slowing global growth, essential dry commodities like iron ore and copper have been declining since April/May of 2019.

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The copper-gold ratio has shown a decline after peaking in June 2018.

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The copper-gold chart looks similar to the 10Y US Treasury yield chart.

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Is the global economy paranoid about China-US trade and Brexit impacts?

 

Oyster Stew! Baltic Dry And Cass Freight Indices Still Above 2014-2017 Levels

The Trump Administration’s partial tariff truce with China drew swift criticism for not being enough. For example, from Bloomberg Economics, …

“Past experience is that U.S.–China trade agreements aren’t worth the paper they are written on, and this one hasn’t even been written down. For now, though, indications on trade are a little more positive. If that persists, it could help put a floor under sliding global growth.”

Tom Orlik and Yelena Shulyatyeva, Bloomberg Economics

Take two important shipping indices, the Cass Corp Freight Index (Shipments) and the Baltic Dry Shipping Index. Both indices are still higher today than at any time between 2014-2017.

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Sure, the Baltic Dry Index is lower than it was in was in September 2019, just a month ago (white line). But it is still higher than at any time in the 2014-2017 time frame.

The same for the Cass Corp Freight Shipment index (green line) is below its peak in 2018, but still higher than at any point from 2012 to 2017.

So while trade tariff progress is moving along, the media and economists conveniently forget that shipping is still stronger than it was from 2014-2017.

Hence, the media’s negativity about the US-China trade negotiations is just a bowl of oyster stew.

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Trade Fog! UK Industrial Production Falls 1.8% YoY In August, China’s Offshore Currency Goes Bananas And Gold Price/ Volatility Rises, V2X Volatility Goes Haywire

This is an update on key economic news relating to US/China trade and UK/EU Brexit talks. Better known as Trade Fog … or simply “The Fog.” 

On the Brexit side, the UK avoided recession by posting of 0.3% in August. Unfortunately, UK industrial production tanked to -1.8% YoY signaling a slowdown for the UK economy.

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On the China/US trade arm wrestling match, China’s offshore currency is showing volatility as even the NBA is getting caught up in the trade scuffle.

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The volatility surface for the CNH is quite steep.

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Of course, trade fog helps assets such as gold to rise.

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The volatility surface for gold is similar to that of the Chinese offshore currency.

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Trade fog (or trade vacillation) is on the rise as seen in this chart of V2X volatility.

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The V2X index is above its various historic moving averages.

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As Brexit negotiation crawl along and the US meets with China or tariffs, we continue to see “The Fog” until Brexit and tariffs are finalized. Throw in Federal Reserve policy errors and we have a party!

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Fear! Interest Rate Derivatives Trading Explodes to $6.5 Trillion Per Day

Brexit, slowing global growth, Central Bank monetary follicies (negative rates). Lots of economic uncertainty and a growing demand to hedge interest rates. In other words, lots of fear.

According to the BIS, daily turnover of OTC interest rate derivatives averaged $6.5 trillion in April 2019, up markedly from the April 2016 survey when it averaged $2.7 trillion per day. This rise appears to have been driven mainly by increased hedging and positioning amid shifting prospects for growth and monetary policy.

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However, other factors also played a role. Much of the turnover in April 2019 was in shorter-term contracts, which are rolled over more often. In addition, the 2019 survey saw more comprehensive reporting of related party trades than in previous surveys. Average daily turnover in April 2019, after adjusting for these trades, is estimated to have been closer to $5.8 trillion in April 2019, up around 120% since the 2016 survey.

The majority of turnover of OTC interest rate derivatives is in swaps and denominated in the mighty US dollar.

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The home of the largest turnover (aka, trading) is in the UK, followed by Hong Kong and then the USA.

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Yes, lots of fear regarding interest rates.

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The Big Short: Part Deux? US Home Prices Slow As Wage Growth Highest Since Early 2009 (Tiny Bubble OR BIG Bubble?)

No matter which US home price index you choose, US home prices have risen above the peak of the housing bubble in April 2007 (as highlighted in the book and film “The Big Short”).

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Thanks to relaxed credit standards, including the infamous NINJA (no income, no job) loans, the US saw a steady and increasing growth in mortgage credit and a corresponding growth in home price growth … until 2005. Then the bottom fell out out the housing market.

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Today, we are witnessing a slowing of home price growth even as earnings growth is at its highest level since early 2009.  The last time we saw home price growth and earnings growth so in alignment was back in the 1995-1998 period following the enactment of HUD’s National Homeownership Strategy. 

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The big difference between the 2000s housing bubble and today’s housing bubble is that the 2000s housing bubble was driven by subprime and ALT-A credit. But today’s housing bubble is in part driven by foreign investors on both the west and east coasts, not to mention the Federal Reserves low interest-rate policies. And we are seeing a softening of credit standards from Fannie Mae and Freddie Mac.

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And Fannie and Freddie’s debt-to-income (DTI) is rising to 2008 (financial crisis levels).

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So does the US have a tiny bubble? Or a big bubble?

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Draghi Goes Big! Draghi Faced Unprecedented ECB Revolt as Core Europe Resisted QE (France, Germany Versus Spain, Italy, Greece)

This reminds me of the Mel Brooks skit “The people are revolting.”

It this case, it is France and Germany resisting more QE while “the people” (Spain, Italy and Greece) are revolting and pushing for more QE.

(Bloomberg) — European Central Bank governors representing the core of the euro-area economy resisted President Mario Draghi’s ultimately successful bid to restart quantitative easing, according to officials with knowledge of the matter.

The unprecedented revolt took place during a fractious meeting where Bank of France Governor Francois Villeroy de Galhau joined more traditional hawks including his Dutch colleague Klaas Knot and Bundesbank President Jens Weidmann in pressing against an immediate resumption of bond purchases, the people said. They spoke on condition of anonymity, because such discussions are confidential.

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Those three governors alone represent roughly half of the euro region as measured by economic output and population. Other dissenters included, but weren’t limited, to their colleagues from Austria and Estonia, as well as members on the ECB’s Executive Board including Sabine Lautenschlaeger and the markets chief, Benoit Coeure, the officials said.

Mario Draghi says the ECB will maintain a “highly accommodative stance of monetary policy.”

Such disagreement over a major monetary policy measure has never been seen during Draghi’s eight-year tenure. It casts a shadow over the resolve underpinning his parting stimulus shot before Christine Lagarde succeeds him, and also over his account of the proceedings. The extent of the rift might open the door to critics of the institution to question the legitimacy of its decisions.

Despite the disagreement, Draghi presented the decision to relaunch QE as having enough support to move forward. There was no vote on the matter, in line with typical ECB practice. Such a ballot would be a rare occurrence, but if one had taken place, under the Governing Council’s system of rotation to streamline decision-making, the French and Estonian governors would have been unable to cast a vote this month.

“There was more diversity of views on APP. But then, in the end, a consensus was so broad there was no need to take a vote. So the decision in the end showed a very broad consensus. As I said, there was no need to take a vote. There was such a clear majority.” 
– Mario Draghi, Sept. 12 press conference in Frankfurt

One key argument wielded by policy makers opposed to Draghi’s resumption of QE was that it would be better to save it to use as a contingency in an emergency, such as an abrupt outcome to Brexit if the U.K. leaves the European Union without a transition deal, the officials said.

Spokesmen and spokeswomen for the Austrian, Dutch, Estonian, French and German central banks declined to comment on the ECB discussions. An ECB spokesman also declined to comment.

QE has previously proved contentious. Draghi encountered significant opposition in 2015, when he pushed the Governing Council to start bond purchases, against the wishes of his German, Dutch, Estonian and Austrian colleagues.

Draghi’s decision to press ahead without such key support risks leaving Lagarde with a headache when she starts in November. She will need to decide whether to persist in a policy that has divided her Governing Council, risking further acrimony. The alternative would be to dial back the ECB’s current stimulus commitments, an approach that could provoke a market backlash.

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That’s what she said.

Seriously, how much extra QE does Spain, Italy and Greece want?

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Is it because their banking systems are still in the doldrums? Here is a sample of an Italian, Spanish and Greek bank.

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What I Like About Central Banks … NOT! Global Central Banks Pushing Interest Rates Lower Towards Negative Territory

The CFR Global Monetary Policy Tracker is updated through September 1. The Index of Global Easing(-)/Tightening(+) holds steady at -6.68, significant easing, as markets anticipate a further Fed rate cut this month.

Easing monetary policy are Brazil, Chile, Peru and Colombia in South America, the European Central Bank, Australia, China, Turkey, Poland and Finland. Tightening? Pakistan, Sweden, the UK and Canada.

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Almost 80% of negative yielding debt is held by global central banks.

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So, what I like about Central Banks?? Nothing, as they continue their nosedive into negative interest rate territory.

Or as Borat said, … NOT!

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Release The Liquidity! China’s PBOC Cuts Required Reserve Ratio Releasing $126BN In Liquidity, Renminbi Rises

On Friday the PBOC announced it would cut the required reserve ratio (RRR) for all banks by 0.5% effective Sept. 16 (and by 1% for some city commercial banks, to take effect in two steps on Oct. 15 and Nov. 15), releasing 900 billion yuan ($126 billion) of liquidity in the PBOC’s first broad and targeted RRR cut since 2015, helping to offset the tightening impact of upcoming tax payments.

While today’s rate cut – which was expected following the State Council meeting and ahead of the Oct.1 National Day Chinese holiday – was more than the previous cuts in January and May, which released 800 billion yuan and 280 billion yuan, respectively, the PBOC stated that “China won’t adopt flood-like monetary stimulus” and that they will continue “prudent” monetary policy to “keep liquidity at (a) reasonably ample level” and will “strengthen the counter-cyclical adjustment.”

Or China is panicking over their slowing economy at 1.6% QoQ.

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The offshore Renminbi spike sharply on the announcement.

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Release the liquidity!

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Gold, Housing And Credit Impulses (US House Price Growth Slowing As US Residential Credit Impulse Slows)

As Hurricane Dorian (cat 4) approaches the eastern Florida coast and Hong Kong protestors clash with police, I thought I would discuss something cheerful .. like rising home prices globally and in the US. Cheerful for current homeowners that is, not current renters.

According to the International Monetary Fund (IMF), the global REAL house price index (white line) has recovered from the global housing bubble burst and is now at an all-time  high. US NOMINAL home prices have recovered from the housing bubble and are now higher than at the peak of the US housing bubble (2005).

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If we look at real estate with respect to gold, US housing was the most expensive in the early 2000s. And the ounces of gold needed to buy an average US home remains relatively low (that is, back to 1984 ratios).

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Of course, the flow of credit can help explain housing prices. In the US, both Commercial and Industrial loans (C&I) and loans and leases (Lo&Le) are significantly lower than during the late 2000s. Yet, US home prices continue to rise.

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If we put home price growth YoY (green line) on the chart, you can see home price growth slowing with the lower than average credit impulse (red line).

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At the global level, credit impulses are down but may be showing signs of increasing.

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My Kuroda! Bank of Japan Cuts Bond Purchases In Effort To Stop Benchmark Yields From Falling To Record Lows (US Fed Starting QE4?)

My Kuroda!

Haruhiko Kuroda and the Bank of Japan are trying to stop plummeting Japanese yields.

(Bloomberg) — The Bank of Japan intensified its efforts to stop benchmark yields from falling to record lows by cutting bond purchases on Friday and then paving the way to reduce them further in the coming month.

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The central bank followed up on a 50-billion yen ($470 million) reduction in purchases of five-to-10 year debt this morning with a move to lower the buying range for this key maturity zone at its operations in September.

Speculation the BOJ would step in to halt the slide in yields was running highas the global debt rally caused the 10-year yield to drop further out of the central bank’s target range. Having come within one basis point of an all-time low of minus 0.3% on Thursday, the yield rose following BOJ’s actions on Friday, with that on similar-maturity U.S. Treasuries also moving higher.

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On the other side of the Pacific Ocean, the US Federal Reserve has reversed course on letting their Treasury Notes and Bonds mature (unwind) and are letting their System Open Market Account rise for the second week in a row. Is this the start of QE4??

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Kuroda and the Bank of Japan see no end in sight for plunging interest rates.

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