Divergence! Hong Kong’s HIBOR/LIBOR Spread Largest Since Financial Crisis While PBOC’s Balance Sheet Diverges From US Fed’s (China Default Crisis?)

There is considerable divergence between China and the US in terms of financial condition. The trade disagreement between China and the US comes to mind.

usexportstohina.png

First, there is considerable divergence between Hong Kong’s 1-month interbank lending rate, HIBOR, and the US 1-month interbank lending rate LIBOR. In fact, the divergence is the greatest since the financiak crisis. For the moment, the US Fed is engaged in quantitative tightening (QT) while China is frantically going the opposite direction.

hhiborlibor.png

Second, Central bank balance-sheet divergence is reducing the impact of China’s government-induced liquidity injections, contributing to an increase in corporate defaults. Since Fed run-off began in October 2017, the impact of People’s Bank of China (PBOC) balance-sheet expansion has diminished considerably, as the FX-adjusted effect of last year’s 1 trillion yuan in central bank stimulus resulted in a $160 billion contraction when converted into U.S. dollars. Total assets at China’s central bank rose 2.6% to a record 37.2 trillion yuan in 2018. Yet, when expressed in dollars, the PBoC’s balance sheet fell by 2.9% to $5.4 trillion.

Chinese onshore defaults rose to a record $16.5 billion in 2018, and are up $1.4 billion year-to-date. China offshore defaults rose to $3.3 billion in 2018, and are up another $275 million in 2019.

pbocvsfed

The Dow is up over 200 points on a deal preventing a US government shutdown. Democrats agreed to build a wall between the US and Mexico … 55 miles of the 2,000 mile US-Mexico border. As if drug traffickers (and cartels), human traffickers and gangs like MS-13  can’t figure out how to bypass the 55 miles of additional walls. 

chinagreeting

(Un)Willing! Bank Willingness To Lend To Consumers Drops To Zero (Recession Alert!)

It seem s that banks willingness to lend to consumers hass fallen. Perhaps it should be an index of “Willing.”

Bank willingness to lend to consumers, a prime driver of Federal Reserve monetary policy, typically slumps to zero before a recession.

unnamed (1)_6

Yes, as The Fed continues to unwind its balance sheet, bank willingness to lend to consumers is melting.

The Federal Reserve Open Market Committee (FOMC) looks at the bank willingness to lend numbers.

fedresbog.png

Former Fed Chief Yellen Says Rates Could Next Move Up or Down (Implied Rate Forecast Is Down, US Treasury Curve Downward Sloping From 1-3 Years)

My favorite Bloomberg headline of all time is: “Former Fed Chief Yellen Says Rates Could Next Move Up or Down.” Wow, how insightful. But of course, she was refering to The Fed Funds Target rate which she kept at 25 basis points seemingly forever. However, current Fed Chair Jerome Powell could either raise, lower of keep rates constant, depending on the state of economy.

But then again, both the ECB and Bank of Japan are currently at zero (ECB) and below zero (BOJ). The US Fed is headed in a direction that differs from other central banks.

fedboj.png

While Powell has been increasing The Fed Funds Target rate AND shrinking The Fed’s balance sheet, Europe is drowning in negative target rates (Eurozone, Switzerland, Sweden, Denmark) as is Japan.

cbrates

But in terms of central bank balance sheets, only the US is shrinking their balance sheet.

balancesheets

There are currently around $9 trillion of bonds trading at negative interest rates.

9trill

As we stand today, the US Treasury yield curve is downward sloping at tenors 1-3 years.

tac

The current implied policy curve for The Fed is declining (meaning Fed Fund rate cuts are implied in 1-3 years.

impliedratecurve.png

So, former Fed Chair Janet Yellen thinks rates could go up or down.

yellenpredicting.png