Conference Board Leading Index MoM Prints At -0.1% (NOT Screaming Impending Recession, But Fed Manning The Bilge Pumps!)

The Conference Board leading index printed at -0.1% MoM indicating a slow but expanding economy through early 2020.

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But Jerome Powell and The Federal Reserve are manning the economic bilge pumps just in case.

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Yes, The Fed will be trying to pump liquidity into the economic ship in case it takes on too much salt water.

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“Man the pumps!!!”

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U.K. Bank Credit Rallies as Johnson Strikes Brexit Deal With EU (UK CoCo Prices Jump, But Not Deutsche Bank’s 6% CoCo)

While the UK Parliament has to sign off on the Brexit agreement, bank credit rallies after Boris Johnson reached an agreement with the EU.

U.K. lenders’ riskiest notes jumped, leading a credit rally, after Prime Minister Boris Johnson reached a Brexit agreement with the European Union.

Barclays Plc’s 1.25 billion pound ($1.6 billion) 5.875% CoCo reversed earlier losses and hit 99.5 pence on the pound, the highest since May 2018, according to data compiled by Bloomberg.

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Nationwide Building Society’s 600 million-pound perpetual bond, sold last month, hit a record. Oddly, NBS’s perpetual bond started rising on October 10th, well before PM Boris Johnson announced his Brexit agreement.

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A contingent convertible bond (CoCo), also known as an enhanced capital note (ECN) is a fixed-income instrument that is convertible into equity if a pre-specified trigger event occurs.

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A famous CoCo bond is the Deutsche Bank 6% Perpetual.

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While issued at par (100), the G-spread on the Deutsche’s 6% CoCo bond is … 11%.

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Odd, that DB’s CoCo bond remained relatively calm after the Brexit deal was announced.

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Is that UK PM Boris Johnson or Martin Kernsten, the Nipple King from Parks and Recreation?

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Its always sunny in the UK!

Free Cat? World’s Best-Run Pension Funds Say It’s Time to Start Worrying (Not Enough Revenue Thanks To ECB Policies And Inflated Liabilities)

State and Federal pension funds are plagued by extravagant promises to pensioners and low yields on pension assets caused, in part, by Central Banks, like the European Central Bank and Federal Reserve.

(Bloomberg) Back in 2012, the world’s best-managed pension market was thrown a lifeline by the Danish government to help contain liabilities. That was when interest rates were still positive.

Seven years later, with rates now well below zero, even Denmark’s $440 billion pension system says the environment has become so punishing that it may be time for a change in European rules.

Henrik Munck, a senior consultant at Insurance & Pension Denmark, an umbrella organization, says the way liabilities are currently calculated “could cause a negative spiral” that forces funds to keep buying low-risk assets, drive yields lower and the value of liabilities even higher.

The warning comes as pension firms across Europe struggle to generate the returns they need to cover their growing obligations. In Denmark, some funds saddled with legacy policies guaranteeing returns as high as 4.5% have had to use equity to meet their obligations.

To calculate liabilities, pension firms use a complex mathematical formula constructed by the European Insurance and Occupational Pensions Authority (EIOPA). The formula is intended to shield funds from erratic market swings that artificially inflate or hollow out balance sheets. But with negative rates more entrenched, there are signs the EIOPA curve, as it’s called, may not be working as intended.

“When pension funds across Europe de-risk simultaneously, it may actually become pro-cyclical: it increases the price movements, and it could result in yet more downward pressure on the EIOPA yield curve, exacerbating the problem,” Munck said.

The curve is comprised of several elements. Its backbone — the euro interest-rate swap curve — has sunk since its implementation about four years ago, driving up the value of liabilities.

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PFA, like many Danish pension funds, started scaling back guaranteed products for retirees many years ago. That’s given it a buffer to help absorb some of the shock of growing liabilities. But not everyone’s as well prepared. “If the discount curve is more volatile and you can’t hedge it, you can — if you don’t have enough capital — be forced to lower risk on the more hedgeable space, to compensate,” Damgaard said.

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Low volatility assets like sovereign debt?? Pretty soon, government pensions will have to deliver cheaper payments to pensioners.

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US Unemployment Rate Falls To Lowest Since 1969, Yield Curve Rises At Short-end (The Great Technology Disruption?)

Despite the hysteria over global warming and Presidential impeachment, the US economy keeps chugging along and now has the lowest U-3 unemployment rate since 1969. 

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While the Dow rose more than 200 points on the employment news …

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the US Treasury yield curve actually steepened in the very short end (but still lower than on October 1st).

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Two of the top three industries for jobs added are 1) education and health, and 3) government. Leisure and hospitality (bartenders and waitstaff) are in 4th place.

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The good news about bartending is that it is difficult to be replaced by technology. Waitstaff can be replaced, just ask the waitstaff at The Olive Garden and numerous fast food restaurants. Education can also be replaced by technology (Northwestern and MIT are two high profile universities offering on-line certificate programs). Healthcare is already being rocked by technology.

So, let’s see how US unemployment and jobs added changes over time with growing technology disruption.

Author Kurt Vonnegut predicted this automated dystopia in 1952 in his novel “Player Piano.”

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An automated burger machine!

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Alarm! VIX Futures Curve Inverts As Dow Drops >500 Points (Tech Stocks Hammered)

It’s NOT always sunny in financial markets.

Today, the Dow dropped >500 points (2%) as of 12:2pm EST. Europe is even worse with the FTSE 100 down 3.23%.

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Meanwhile, the VIX futures curve has inverted!

(Bloomberg) — The front of the VIX futures curve has inverted, pointing to acute concern about the near-term outlook for a stock market that’s come under considerable pressure the last two days.

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Some traders use a VIX curve inversion as a “take cover” signal, noting that would have helped avoid much of the damage associated with risk routs in Q4 2018, during the February 2018 Volmageddon, and amid the August 2015 devaluation of the yuan. On the other hand, it’s also produced numerous false positives. For instance, the Aug. 5 inversion on a closing basis also marked an intermediate bottom for the S&P 500.

For investors in long/short volatility exchange-traded products, this is when the term structure starts to act as a headwind or tailwind for performance.

Tech stocks are getting blasted (Microsoft, Apple, Cisco, Intel).

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Green man strikes again!

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US Average Hourly Earnings (3 Mo Avg) Highest Since President GWBush, Home Price Growth Lowest Since 2012 (Housing Bubble Redux?)

Unlike the housing bubble and “The Big Short” years of 2005-2007, when home price growth was greater than average hourly earnings growth, we are now in the opposite situation: slowing 2% YoY home price growth and the highest average hourly earnings growth rate since 2008 and President George W. Bush.

Home price growth is slowing …

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As average hourly earnings growth rises to its highest level since 2008 and George “Dubya” Bush.

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Using a different home price growth index (FHFA Purchase Only) and an average hourly earnings for the majority of Americans, you can see where home price growth exceeds average hourly earnings growth starting in 1998 and ending in 2006 (the “Big Short” bubble) and the QE3-induced home price bubble starting in 2012 to today.

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Between HUD’s National Homeownership Strategy of 1995 and The Fed’s quantitative easing (particularly QE3). the US Federal government is doing the “housing bubble dance.”

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Rollercoaster! Mortgage Refi Wave Seems Over As Refi Apps Decline 15% WoW

Refi rollercoaster!

US home mortgage rates fell from almost 5% in November 2018 to 3.5% in September 2019 before rising a bit. This spurred a “refi wave” since late November 2018.

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But the refi party seems to have ended (for the moment).

Mortgage applications decreased 10.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 20, 2019.

The Refinance Index decreased 15 percent from the previous week and was 104 percent higher than the same week one year ago.

Yes, the “refi wave” seems over as

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The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. The unadjusted Purchase Index decreased 4 percent compared with the previous week and was 9 percent higher than the same week one year ago.

Now, as Democrats in the US House of Representatives undertake their impeachment of President Trump in part for not releasing the transcript of his call with the Ukrainian President Zelenskyy (that has been released), it will likely lead to an increase in Treasury Note 10y prices and a decline in yields (and mortgage rates) as Democrats focus on impeachment and stonewall any attempts at a trade agreement with China.

Jerome?

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The Reasonabilists? Negative-yielding Debt Exceeds $17 TRILLION With Japan And France Leading In Negative-yield Issuance (Danish 10-year Fixed Mortgage Rates At -0.5%!)

It has been over 100 years since The Federal Reserve System was created by Congress in December 1913 and then signed into law by President Woodrow Wilson. Since its creation, the purchasing power of the US dollar for consumers has gone from $3.32 in December 1913 to $0.13 today.

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Virtually even nation has a central bank and together they have helped push down sovereign yields into negative territory in the amount of > $17 TRILLION.

The global stock of negative-yielding debt is now in excess of $17 trillion as rising market volatility lends extra force to this year’s unprecedented bond rally.

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Thirty percent of all investment-grade securities now bear sub-zero yields, meaning that investors who acquire the debt and hold it to maturity are guaranteed to make a loss. Yet buyers are still piling in, seeking to benefit from further increases in bond prices and favorable cross-currency hedging rates—or at least to avoid greater losses elsewhere.

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France is the leader in Europe at $2.3 trillion in negative-yielding sovereign debt. France’s 10-year sovereign debt bears a coupon of 0.50% at €109.004 and a yield of -0.408%.

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Japan, of course, is the global leader in negative-yielding debt at $7.3 TRILLION.

Mortgage rates can be negative as well. Just ask the Danish bank Jyske Bank. Jyske is offering a 10-year fixed-rate mortgage (FRM) at … -0.5%.  Finland’s Nordea Bank is offering a 20-year FRM in Denmark at … 0%.

But wait! Who on earth would buy negative interest rate mortgage bonds? PIMCO, that’s who! 

But are negative mortgage rates reasonable? Or is Zorp the Surveyor approaching?

Zorp the surveyor.

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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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US Home Price Growth Weakest In 7 Years (Phoenix Now Fastest Growing Home Prices, Seattle Home Prices Declining)

US national home price growth has slowed to its lowest level in 7 years, according to  June’s Case-Shiller report.

The decline in national home price growth coincides with The Fed’s decision to let its balance sheet self-unwind.

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Phoenix, my former residence, is now the fastest growing metropolitan area in the US, even faster than Las Vegas. Seattle is now the slowest growing metro area in terms of home prices and is actually declining. San Francisco is barely above 0% at 0.7% YoY.

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The FHFA purchase-only home price index YoY has fallen to 1.0.

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Time for some more “Fed Fresh” spray?

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