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China Credit and Global Inflationary Dynamics

February 14 - Bloomberg: "China added more credit last month than the equivalent of Swedish or Polish economic output, revving up growth and supporting prices but also fueling concerns about the sustainability of such a spree. Aggregate financing, the broadest measure of new credit, climbed to a record 3.74 trillion yuan ($545bn) in January... New yuan loans rose to a one-year high of 2.03 trillion yuan, less than the 2.44 trillion yuan estimate. The credit surge highlights the challenges facing Chinese policy makers as they seek to balance ensuring steady growth with curbing excess leverage in the financial system."

Like so many things in The World of Finance, we're all numb to Chinese Credit data: Broad Credit growth expanded a record $545 billion in the month of January, about a quarter above estimates. Amazingly, last month's Chinese Credit bonanza exceeded even January 2016's epic Credit onslaught by 8%. Moreover, as Bloomberg noted, "The main categories of shadow finance all increased significantly. Bankers acceptances -- a bank-backed guarantee for future payment -- soared to 613.1 billion yuan from 158.9 billion yuan the prior month."

February 14 - Bloomberg: "China's shadow banking is back in full swing. Off-balance sheet lending surged by a record 1.2 trillion yuan ($175bn) last month... Efforts by the People's Bank of China to curb fresh lending may have prompted banks to book some loan transactions as shadow credit, according to Sanford C. Bernstein."

Yet this was no one-month wonder. China's aggregate Credit (excluding the government sector) expanded a record $1.05 TN over the past three months, led by a resurgence in "shadow" lending. According to Bloomberg data, China's shadow finance expanded $350 over the past three months (Nov. through Jan.), up three-fold from the comparable year ago period.

Friday from Bloomberg: "White House Chaos Doesn't Bother the Stock Market." Many are confounded by stock market resilience in the face of Washington discord. Perhaps it's because global liquidity and price dynamics are currently dictated by China, the BOJ and the ECB - rather than Washington and New York. Eurozone and Japanese QE operations continue to add about $150bn of new liquidity each month. Meanwhile, Chinese Credit growth has accelerated from last year's record $3.0 TN (plus) annual expansion.

February 14 - Bloomberg (Malcolm Scott and Christopher Anstey): "Forget about Donald Trump. The global reflation trade may have another driver that proves to be more durable: China's rebounding factory prices. The producer price index has staged a 10 percentage-point turnaround in the past 10 months, posting for January a 6.9% jump from a year earlier. Though much of that reflects a rebound in commodity prices including iron ore and oil, China's economic stabilization and its efforts to shutter surplus capacity are also having an impact."

China's January PPI index posted a stronger-than-expected 6.9% y-o-y increase. A year ago - back in January 2016 - y-o-y producer price inflation was a negative 5.3%.  It's worth noting that China's y-o-y PPI bottomed in December 2015 at negative 5.9%, the greatest downward price pressure since 2009. In contrast, last month's y-o-y PPI jump was the strongest since August 2011 (7.3%). China's remarkable one-year inflationary turnaround was not isolated in producer prices. China's 2.5% January (y-o-y) CPI increase was up from the year ago 1.8%, matching the peak in 2014.

There are two contrasting analyses of China's record January Credit growth. The consensus view holds that Chinese officials basically control Credit growth, and a big January confirms that Beijing will ensure/tolerate the ongoing rapid Credit expansion required to meet its 6.5% 2017 growth target (and hold Bubble collapse at bay). This is viewed as constructive for the global reflation view, constructive for global growth and constructive for global risk markets. Chinese tightening measures remain the timid "lean against the wind" variety, measures that at this point pose minimal overall risk to Chinese financial and economic booms.

An opposing view, one I adhere to, questions whether Chinese officials are really on top of extraordinary happenings throughout Chinese finance, let alone in control of system Credit expansion. Years of explosive growth in Credit, institutions and myriad types of instruments and financial intermediation have created what I suspect is a regulatory nightmare. I seriously doubt that PBOC officials take comfort from $1.0 TN of non-government Credit growth over just the past three months.

Indeed, I suspect authorities will be compelled to ratchet up tightening measures. Not only is timid ineffective in the face of rampant monetary inflation. It actually works to promote only greater excesses and resulting maladjustment. I would argue that Chinese officials today face a more daunting task of containing mounting financial leverage and imbalances than just a few months ago. The clock continues to tick, with rising odds that Beijing will be forced to take the types of forceful measures that risk an accident.

Inflationary biases evolve significantly over time. For example, QE in one market environment can have profoundly different inflationary effects than in a different backdrop. Liquidity will tend to further inflate the already inflating asset class(s); "hot money" will chase the hottest speculative Bubble. Inflationary surges in Credit growth can, as well, have profoundly different impacts depending on inflationary expectations, economic structure and the nature of financial flows.

I strongly contend that a more than one-half Trillion ($) one-month Chinese Credit expansion in early 2017 will exert divergent inflationary impacts to those from early 2016. Why? Because of distinct differences in respective inflationary backdrops. This time last year, disinflationary pressures were demonstrating powerful momentum. The Chinese economic slowdown was gathering force, the financial system was under mounting stress, funds were fleeing the country, and fear was overwhelming greed. Compared to this time last year, crude prices are today about a third higher. Importantly, last year's massive Credit expansion upended disinflationary forces.

Today's inflationary backdrop offers a notable contrast: the inflationary path of least resistance is now higher. This argues that Credit excesses will exert a more robust impact on inflationary biases throughout the Chinese economy - inflationary forces that have achieved powerful self-reinforcing momentum. Furthermore, official efforts to restrict financial outflows add a further dimension to the analysis. Not only do I expect this year's Credit to exhibit more potent effects, it is also likely that tighter regulations ensure less finance leaks out of the system through international flows. In short, unprecedented quantities of new "money" and Credit will in 2017 further inflate a Chinese economic system already terribly maladjusted by years of unprecedented monetary excess.

Already this year, Emerging Market equities (EEM) have posted double-digit gains (10.1%). Stocks in Brazil and Argentina are up 12.5% and 16.3%. Indian stocks have risen 6.9%. Too be sure, the incredible Chinese Credit boom is playing a major role in fueling strengthening inflationary biases throughout developing markets and economies.

February 15 - Bloomberg (Sho Chandra): "Forget wondering when U.S. inflation will reach the Federal Reserve's goal. It may be there already. The biggest monthly jump in almost four years in the Labor Department's consumer-price index led some analysts to raise their estimates... for the Fed's preferred inflation gauge, the Commerce Department's personal consumption expenditures price index. Morgan Stanley's Ted Wieseman and Michelle Girard of NatWest Markets both said that the PCE measure probably rose 2% in January from a year earlier, up from previous projections of 1.8%. Economists at Goldman Sachs gave an estimate of 1.98%."

Here at home, January CPI rose 2.5% y-o-y, the strongest gain since early 2012 (core CPI up 2.3% y-o-y). After drifting around zero for much of 2014, y-o-y CPI increased to 1.4% by January 2016. Anyone doubting that global inflationary dynamics have evolved from a year ago should examine a few CPI charts.

Talk one year ago was of indomitable global deflationary forces. The ECB and BOJ stepped up with major QE expansions, while the Fed put rate normalization on hold after a single little baby step. Central bank buying coupled with already over-liquefied markets spurred a historic collapse in global bond yields. After beginning the year at 62 bps, a melt-up in bund prices saw yields sink to below zero by June (on the way to negative 19bps). Italian yields dropped from 1.59% to 1.04%. Spanish yields fell from 1.77% to 0.88%, while French yields dropped from 0.99% to 0.10%. Yields in the UK sank from 1.96% to 0.52%. Japanese yields dropped from 0.26% to negative 0.29%. After beginning 2016 at 2.25%, ten-year Treasury yields were down to 1.36% near mid-year. Too much "money" (speculative and otherwise) chasing too few bonds.

There are now apparently ample quantities of bonds for global buyers. With inflation dynamics pointing to rising general price levels, "risk free" sovereign bonds are no longer the securities of choice. Importantly, ongoing QE has ensured that markets have become only more over-liquefied. These days, however, it's much more a case of "too much 'money' chasing too few equities and corporate debt instruments"

Highly speculative sovereign debt markets dislocated back in 2016. It was the type of speculative blow-off and derivative-related melt-up that previously would have ended in tears (along with bloody havoc). So far, ongoing QE and near-zero rates have ensured a most orderly of major market reversals. At the same time, the monetary backdrop has guaranteed that speculative melt-up dynamics have turned their sights on equities, corporate debt and EM. Global markets are today being dictated by extraordinary monetary and speculative dynamics. Trump policy proclamations provide convenient market justification and rationalization.

It is a prevailing 2017 theme that global markets are extraordinarily vulnerable to an unexpected change in the monetary backdrop. Count me just as skeptical of the current equities surge as I was of last year's surging bond markets. In my mind, the 2017 bull story for equities is as dubious as last year's deflation histrionics - rationalization for a surge in bond prices driven more by a powerful global market dislocation than underlying fundamentals.

I'm not necessarily arguing that we've commenced a sustainable surge in consumer price inflation. An accident in China, Europe or Japan (to name only the most obvious), and the world could sink right back into the disinflationary muck. At least in the short-term, the upward momentum in inflationary pressures could be enough to sway central bank decision making. So long as CPI trends were pointing downward, it was easy to rationalize the positive case for QE. CPI pointing upward around the globe just might have central bankers thinking twice about QE infinity. For a number of years now, market operators have slept soundly at night knowing any meaningful "Risk Off" (de-risking/de-leveraging) would be countered with yet another batch of QE.

Yellen took on a relatively more hawkish tone this week. The March 15 FOMC meeting is now in play for a rate rise, while an increasing number of analysts are now forecasting three increases during 2017. The ECB will clearly face heightened pressure to wind down QE. And even BOJ chief Kuroda this week made uncharacteristically cautious comments with respect to the risks of monetary stimulus. But in the short-term, I'll look to Beijing for perhaps the most intriguing monetary developments. And there is support for the view that recent equity gains have been fueled by market dislocation dynamics, the type of advance that would leave risk assets especially vulnerable to a changing monetary backdrop.

February 16 - Wall Street Journal (Chris Dieterich and Gunjan Banerji): "It is the buzz of Wall Street: a five-day, 15% plunge in a U.S. mutual fund whose bearish bets were undone by the S&P 500's latest run to fresh records. The decline of Catalyst Hedged Futures Strategy fund, a $3.4 billion fund employing complex derivatives, is topic du jour on trading desks fixated on the surprising resilience of the postelection U.S. stock rally and the long decline of volatility, or price swings. Many investors have been surprised by the S&P 500's 9.7% run-up following the Nov. 8 election... The Catalyst fund typically uses options positions in a configuration that seeks to maximize gains from stable or gently rising markets, or else shield investors from sudden declines."


For the Week:

The S&P500 rose 1.5% (up 5.0% y-t-d), and the Dow gained 1.7% (up 4.4%). The Utilities added 0.3% (up 1.3%). The Banks jumped 3.3% (up 4.9%), and the Broker/Dealers rose 1.5% (up 9.6%). The Transports gained 1.1% (up 5.0%). The S&P 400 Midcaps added 0.8% (up 4.5%), and the small cap Russell 2000 gained 0.8% (up 3.1%). The Nasdaq100 advanced 1.9% (up 9.5%), and the Morgan Stanley High Tech index jumped 1.9% (up 11.0%). The Semiconductors rose 1.4% (up 7.8%). The Biotechs surged 3.8% (up 12.6%). Though bullion was little changed, the HUI gold index declined 2.0% (up 17.7%).

Three-month Treasury bill rates ended the week at 51 bps. Two-year government yields were unchanged at 1.19% (unchanged y-t-d). Five-year T-note yields increased two bps to 1.90% (down 3bps). Ten-year Treasury yields added a basis point to 2.42% (down 3bps). Long bond yields rose two bps to 3.14% (up 7bps).

Greek 10-year yields surged 45 bps to 7.71% (up 69bps y-t-d). Ten-year Portuguese yields dropped nine bps to 4.03% (up 28bps). Italian 10-year yields retreated eight bps to 2.19% (up 38bps). Spain's 10-year yields declined seven bps to 1.64% (up 26bps). German bund yields slipped two bps to 0.30% (up 10bps). French yields declined two bps to 1.04% (up 36bps). The French to German 10-year bond spread was little changed at 74 bps. U.K. 10-year gilt yields fell four bps to 1.21% (down 2bps). U.K.'s FTSE equities index added 0.6% (up 2.2%).

Japan's Nikkei 225 equities index declined 0.7% (up 0.6% y-t-d). Japanese 10-year "JGB" yields were unchanged at 0.09% (up 5bps). The German DAX equities index increased 0.8% (up 2.4%). Spain's IBEX 35 equities index jumped 1.3% (up 1.6%). Italy's FTSE MIB index recovered 0.8% (down 1.2%). EM equities were mixed. Brazil's Bovespa index jumped 2.5% (up 12.5%). Mexico's Bolsa fell 1.3% (up 3.3%). South Korea's Kospi added 0.3% (up 2.7%). India's Sensex equities index rose 0.5% (up 6.9%). China's Shanghai Exchange increased 0.2% (up 3.2%). Turkey's Borsa Istanbul National 100 index jumped 1.6% (up 13.7%). Russia's MICEX equities index fell 1.6% (down 4.7%).

Junk bond mutual funds saw inflows of $158 million (from Lipper).

Freddie Mac 30-year fixed mortgage rates declined two bps to 4.17% (up 50bps y-o-y). Fifteen-year rates fell four bps to 3.35% (up 40bps). The five-year hybrid ARM rate dipped three bps to 3.18% (up 33bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates up seven bps to 4.34% (up 59bps).

Federal Reserve Credit last week expanded $7.8bn to $4.424 TN. Over the past year, Fed Credit fell $34.6bn (down 0.8%). Fed Credit inflated $1.614 TN, or 57%, over the past 223 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt were little changed last week at $3.169 TN. "Custody holdings" were down $86.1bn y-o-y, or 2.6%.

M2 (narrow) "money" supply last week gained $7.7 billion to $13.290 TN. "Narrow money" expanded $875bn, or 7.1%, over the past year. For the week, Currency declined $1.8bn. Total Checkable Deposits dropped $66.7bn, while Savings Deposits jumped $76.1bn. Small Time Deposits and Retail Money Funds were both little changed.

Total money market fund assets declined $2.0bn to $2.675 TN. Money Funds declined $88bn y-o-y (3.2%).

Total Commercial Paper was about unchanged at $965.3bn. CP declined $119bn y-o-y, or 11.0%.

Currency Watch:

The U.S. dollar index was little changed at 100.95 (down 1.4% y-t-d). For the week on the upside, the South African rand increased 2.3%, the Brazilian real 0.9%, the South Korean won 0.3%, the Japanese yen 0.3%, the Norwegian krone 0.3% and the Singapore dollar 0.1%. For the week on the downside, the British pound declined 0.6%, the Mexican peso 0.4%, the euro 0.3%, the Australian dollar 0.1%, the New Zealand dollar 0.1% and the Canadian dollar 0.1%. The Chinese yuan increased 0.17% versus the dollar this week (up 1.14% y-t-d).

Commodities Watch:

The Goldman Sachs Commodities Index declined 1.2% (up 1.1% y-t-d). Spot Gold was little changed at $1,235 (up 7.2%). Silver added 0.7% to $18.05 (up 13%). Crude slipped 46 cents to $53.40 (down 1%). Gasoline fell 4.6% (down 9.2%), and Natural Gas sank 6.6% (down 24%). Copper dropped 1.7% (up 9%). Wheat gained 1.4% (up 12%). Corn added 0.3% (up 7%).

Trump Administration Watch:

February 17 - Bloomberg (Saleha Mohsin): "Within hours of being sworn in, U.S. Treasury Secretary Steven Mnuchin's counterparts from Tokyo to Berlin started telegraphing warnings to him: Please don't call the yen weak. Be careful how you talk about cutting financial regulations -- Europe is listening. As President Donald Trump waited a few weeks for the U.S. Senate to confirm his Treasury secretary pick, the world watched as he and his advisers talked down the dollar and called out China and Japan for gaming foreign-exchange markets... 'The bottom line is whether this is seen as urgent and highly problematic for the rest of the world -- specifically if the administration continues to publicly work through what the strategy for managing the dollar is going to be,' said Nathan Sheets, who was undersecretary for international affairs at the Treasury during the Obama administration."

February 17 - Wall Street Journal (Richard Rubin): "An uncomfortable question looms over the tax debate in Congress: What's Plan B? Border adjustment, a pillar of House Republicans' tax proposal, is taking a beating. Big retailers are lobbying aggressively against the concept, which would tax imports and exempt exports. Senate Republicans have expressed views ranging from skepticism to hostility. Even some House Ways and Means Republicans are wary. With Democrats sidelined, just three GOP senators could kill the House tax plan; already, more than that oppose border adjustment. Despite that daunting math, border adjustment isn't dead, and that is partly because Republicans haven't developed palatable alternatives that avoid huge budget deficits or prevent the corporate tax base from fleeing abroad."

February 13 - Wall Street Journal (Bob Davis): "The White House is exploring a new tactic to discourage China from undervaluing its currency to boost exports, part of an evolving Trump administration strategy to challenge the practices of the U.S.'s largest trading partner while stepping back from direct confrontation. Under the plan, the commerce secretary would designate the practice of currency manipulation as an unfair subsidy when employed by any country, instead of singling out China... U.S. companies would then be in a position to bring antisubsidy actions themselves to the U.S. Commerce Department against China or other countries."

February 15 - Reuters (Stanley White and Leika Kihara): "Japanese Prime Minister Shinzo Abe said... U.S. President Donald Trump shared his view at last week's summit that Japan's monetary policy was not currency manipulation but was intended to end deflation. Abe's comments about the Feb. 10 summit suggest Trump may be softening his criticism that Japan was manipulating its currency to gain a trade advantage."

China Bubble Watch:

February 12 - Bloomberg (Justina Lee): "TLF, MLF, OMO. China's monetary policy is looking increasingly like an alphabet soup, sowing volatility in markets. So far this year, the People's Bank of China has boosted rates on three different liquidity facilities, created a new one, and ordered banks to cut lending. Its most high-profile tools -- the benchmark borrowing cost and reserve-requirement ratio -- have been left untouched. Since liberalizing interest rates in 2015, China has been seeking to modernize its monetary toolbox while tackling slower economic growth, currency weakness and swelling debt. This has prompted the central bank to forge an array of new tools -- a process that has sparked bigger swings in the money market as investors try to interpret them..."

February 14 - Reuters (Elias Glenn): "China's producer price inflation picked up more than expected in January to near six-year highs as prices of steel and other raw materials extended a torrid rally... China consumer inflation also rose more than expected, nearing a three-year high as fuel and food prices jumped... Consumer inflation quickened to 2.5% in January from a year earlier, the highest since May 2014... Producer price inflation accelerated to 6.9% -- the fastest since August 2011 -- from December's rise of 5.5%."

February 17 - Reuters: "China's central bank said... it plans to tighten up its oversight in a range of areas including corporate debt and bank assets, as policymakers fret over fast-rising leverage and the risk of asset bubbles in the rapidly growing economy. The People's Bank of China (PBOC) also said it will keep the yuan currency basically stable while maintaining a prudent and neutral monetary policy. 'We will increase monitoring of corporate debt risk, bank asset quality and liquidity, abnormal stock market fluctuations, use of insurance funds, property bubble risks...and cross-border capital flows,' the central bank said in its fourth-quarter monetary policy implementation report."

February 14 - Bloomberg (Enda Curran): "China's economy may have slipped down the global worry list, but significant risks remain, including an abrupt end to a massive credit boom or an overly aggressive policy response if inflation should speed up, according to Goldman Sachs... While a hard landing isn't the... bank's base case for 2017... economists warn that a push to rein in cheap loans will weigh on key sectors such as housing. Officials are trying to keep a lid on frothy house prices without harming the wider economy, where growth remains heavily reliant on government spending. The scale of the lending boom was laid bare in data Tuesday showing China added more credit in January than the equivalent of Swedish or Polish economic output, fueling worries about the spree's sustainability... 'We see the biggest risks in China centering on the country's rising credit imbalances, with mis-calibration of policy or a sharp external shock as possible triggers of a sharp tightening in credit conditions and hard landing in growth,' economists led by Andrew Tilton wrote."

Global Bubble Watch:

February 15 - Reuters (Leika Kihara): "Bank of Japan Governor Haruhiko Kuroda said low profitability at financial institutions could sow the seeds of a new financial crisis, offering his strongest warning to date of the demerits of aggressive monetary easing pursued by major central banks... 'A new challenge has emerged in the form of low profitability at financial institutions," Kuroda said... 'These developments suggest that a different kind of financial crisis could happen in the future,' he told an international conference on deposit insurers... The remarks contrast with Kuroda's previous comments emphasizing that the benefits of massive stimulus on the economy make up for potential negatives such as the hit to banks."

February 16 - Reuters (Yawen Chen, Elias Glenn, Samuel Shen, Esha Vaish, Gabriel Yiu and Nicole Mordant): "Property investment by Chinese companies plunged in January as authorities tightened restrictions on capital outflows to support the ailing yuan currency and ease pressure on the country's foreign exchange reserves. Investment by Chinese firms in offshore properties -- which has helped fuel sharp and often contentious home price rises from London to Vancouver -- tumbled 84.3% in January from a year earlier... That helped drag China's outbound direct investment (ODI) down 35.7% in January to 53.27 billion yuan ($7.77bn), the weakest in 16 months."

Brexit Watch:

February 17 - Bloomberg (Simon Kennedy): "Former U.K. Prime Minister Tony Blair... cast himself as the leader of the Brexit resistance. In his first major intervention since June's referendum, Blair urged those Britons who want to stay in the European Union to 'rise up in defense of what we believe' in a bid to change people's minds and reverse last year's vote. His aim is to show Prime Minister Theresa May that she won't get everything her own way as she seeks a so-called hard Brexit, prioritizing control of immigration over safeguarding trade ties."

Greece Watch:

February 12 - Financial Times (Wolfgang Münchau): "Failure to tell truth to power lies beneath much of what is going wrong in Europe right now. It may not be the principal cause of the Greek debt crisis, which is now on its umpteenth iteration. But it is more than a mere contributing factor. You notice it particularly at those moments when others speak the truth, as the staff of the International Monetary Fund have done recently. In its latest survey of the Greek economy it states that 'public debt has reached 179% [of gross domestic product] at end-2015, and is unsustainable'. Europeans are not used to such bluntness. The Germans protested. The European Commission protested. So did the Greeks. They all want to keep up the fairy tale of Greek debt sustainability for a little while longer."

February 12 - Wall Street Journal (Simon Nixon): "As a new Greek debt crisis gathers pace, one of the major players in the drama has remained remarkably calm: the International Monetary Fund. European governments and institutions are desperate to resolve a months-old standoff over the next phase of Greece's bailout program. The window for a deal is fast closing with the imminent start of the Dutch election campaign and may not reopen until after the French election in May. But the IMF is proving impervious to political pressure. Some European governments have said they won't give any more money to Greece unless the IMF gives it money too. But the IMF is sticking to its mantra that it won't participate in any new Greek bailout unless it is satisfied the numbers add up. As things stand, it is far from satisfied."

February 11 - AFP (Catherine Boitard): "Greek Prime Minister Alexis Tsipras... warned the International Monetary Fund and EU economic powerhouse Germany to stop playing with fire over his country's debt problems... Months of feuding with the IMF has rattled markets and raised fears of a new debt crisis, with Athens resisting pressure to cut public services any more than has already been agreed with creditors. The Greek premier urged a change of course from the IMF. 'We expect as soon as possible that the IMF revise its forecast.. so that discussions can continue at the technical level,' ...Tsipras called for Chancellor Angela Merkel to 'encourage her finance minister to end his permanent aggressiveness' towards Greece and 'stop playing with fire'. 'The IMF is playing a game of poker by dragging things aside because it does not want to blame the intransigence of the German minister,' Tsipras said, criticising the 'new absurd demands' targeted at Greece.

February 13 - Bloomberg (Marcus Bensasson and Sotiris Nikas): "Greece must immediately reach an agreement with creditors on the release of bailout funds or risk another recession and even more austerity measures, the country's central bank chief said. 'Any further delay in completion beyond this month will feed a new circle of uncertainty,' Bank of Greece Governor Yannis Stournaras told lawmakers... 'Such a vicious cycle could return the economy to recession and a rerun of the negative developments that took place in the first half of 2015.'"

Europe Watch:

February 13 - Bloomberg (Sid Verma): "National Front leader Marine Le Pen's odds of securing an upset in the French presidential race have climbed to 33%, according to bookmakers, from 25% at the end of January. That echoes opinion polls showing the far-right candidate gaining on front-runner Emmanuel Macron, even while they still favor Macron to win the May 7 runoff. The uptick in the implied probability of a Le Pen victory is one of the reasons investors are demanding a higher premium for holding French bonds over similar-maturity German debt."

February 12 - Bloomberg (Patrick Donahue): "Frank-Walter Steinmeier, a vocal critic of Donald Trump elected as Germany's 12th postwar president on Sunday, predicted 'difficulties' in relations with the U.S. as the global order is upended by the new administration in Washington. Asked whether he would seek to improve relations with Russia... said the world was confronting a 'complete re-ordering of international relations.' 'In the past we were always certain that we would have more difficult negotiating partners in the east'" Steinmeier told broadcaster ZDF... 'Suddenly we're confronted with a situation in which we'll at the very least deal with uncertainty and also difficulties in trans-Atlantic relations."

Fixed-Income Bubble Watch:

February 16 - Financial Times (Stephen Foley): "In US corporate bonds right now, it is an issuer's market. Big beasts such as Apple, Microsoft and AT&T found so many wannabe buyers that they were able to supersize their multibillion-dollar fundraisings at the start of February, and even lesser known US companies are issuing debt on the cheap. For example, Snap-on, a maker of tools, sold $300m of bonds this week and was able to slash almost half a percentage point off its interest rate because demand came in higher than expected. This current balance of supply and demand favours issuers, and means that the extra yield on corporate bonds relative to Treasuries has fallen to its lowest level since 2014."

February 13 - Bloomberg (Brian Chappatta): "In the age of Trump, America's biggest foreign creditors are suddenly having second thoughts about financing the U.S. government. In Japan, the largest holder of Treasuries, investors culled their stakes in December by the most in almost four years... And it's not just the Japanese. Across the world, foreigners are pulling back from U.S. debt like never before. From Tokyo to Beijing and London, the consensus is clear: few overseas investors want to step into the $13.9 trillion U.S. Treasury market right now. Whether it's the prospect of bigger deficits and more inflation under President Donald Trump or higher interest rates from the Federal Reserve, the world's safest debt market seems less of a sure thing..."

February 15 - Bloomberg (Sridhar Natarajan and Anders Melin): "When a silicon producer controlled by one-time Spanish finance minster Juan-Miguel Villar Mir came to the U.S. junk-bond market last week, the deal had one curious provision. Ferroglobe Plc earmarked a piece of the bond sale to help fund most of a roughly $30 million payment to Alan Kestenbaum, the former executive chairman who resigned a year after merging his North America-focused Globe Specialty Metals Inc. with billionaire Villar Mir's Spanish conglomerate. Issuers typically don't turn to debt investors to fund golden parachutes, and companies this size don't often have a cash commitment this big for an executive headed out the door... What's more, the company is expected to post an annual loss for the calendar year."

U.S. Bubble Watch:

February 14 - Wall Street Journal (Liz Hoffman and Christina Rexrode): "Shares in America's banks are booming again, with Goldman Sachs..., J.P. Morgan Chase... and Bank of America Corp. hitting fresh trading milestones Tuesday that seemed unreachable during the crucible of the financial crisis. Investor expectations of higher interest rates, lower taxes, lighter regulation and faster economic growth under the Trump administration have added $280 billion in combined market value to the nation's six largest banks since Nov. 8. On Tuesday, shares of Goldman hit a record high, passing a bar first set in 2007 before the financial crisis. J.P. Morgan also hit an all-time closing high."

February 16 - Reuters (Alistair Gray): "More than a million US consumers have fallen at least two months behind on car loan repayments as the delinquency rate reaches its highest level since 2009, in the latest sign of stress in the $1.1tn market. The proportion of soured car loans showed a 13% increase to 1.44% in 2016, according to... TransUnion, the US credit bureau with an anonymised database of 220m consumers. Delinquencies on credit cards also rose by about the same amount over the period to 1.79% — the highest since 2011."

February 14 - Wall Street Journal (Katy Burne): "The Federal Reserve's payments to the U.S. Treasury are projected to fall by more than half in coming years... The payments, called remittances, are projected to fall to around $40 billion annually by 2020, well below the estimated $92 billion the Fed sent last year... That is still way above their average around $25 billion a year from 2001 to 2007, but below the record of $97.7 billion in 2015... Declining remittances come as the new Congress prepares for fresh battles over how to restrain the growth of the federal budget deficit, which was $587 billion in the fiscal year that ended Sept. 30. It is projected to rise sharply in the next decade..."

Federal Reserve Watch:

February 15 - Bloomberg (Patricia Laya and Sho Chandra): "The U.S. cost of living increased in January by the most since February 2013, led by higher costs for gasoline and other goods and services that indicate inflation is gathering momentum. The consumer-price index rose a larger-than-forecast 0.6% after a 0.3% gain in December... Compared with the same month last year, costs paid by Americans for goods and services rose 2.5%, the most since March 2012."

February 15 - Bloomberg (Andrea Wong): "A March interest-rate increase by the Federal Reserve, an unlikely scenario just days ago, is now suddenly on the table after an unexpectedly strong inflation print and hawkish testimony from Fed Chair Janet Yellen to Congress. Derivatives traders are pricing in a 42% probability that the Fed raises rates at its March 14-15 meeting, up from 24% on Feb. 6."

February 14 - Reuters (Jason Lange and David Lawder): "The Federal Reserve will likely need to raise interest rates at an upcoming meeting, Fed Chair Janet Yellen said on Tuesday, although she flagged considerable uncertainty over economic policy under the Trump administration. Yellen said delaying rate increases could leave the Fed's policymaking committee behind the curve and eventually lead it to hike rates quickly... 'Waiting too long to remove accommodation would be unwise,' Yellen told the U.S. Senate Banking Committee, citing the central bank's expectations the job market will tighten further and that inflation would rise to 2%."

February 13 - Bloomberg (Matthew Boesler): "U.S. households' expectations for consumer price inflation rose to the highest level since mid-2015, according to a Federal Reserve Bank of New York survey. The median survey respondent reported an expected inflation rate last month of 2.9% three years ahead, up from 2.8% in December... Expected inflation for one year from now rose to 3%, from 2.8% the month earlier."

February 14 - Reuters: "U.S. producer prices rose more than expected in January, recording their largest gain in four years amid increases in the cost of energy products and some services... The... producer price index for final demand jumped 0.6% last month. That was the largest increase since September 2012 and followed a 0.2% rise in December."

February 14 - Reuters (Jonathan Spicer): "The Federal Reserve will likely have to raise interest rates more rapidly than financial markets currently expect given that any new policies by the Trump administration, while uncertain, will force the Fed's hand, a hawkish central banker said... Since the election of Donald Trump as U.S. president, markets have rallied on hopes of fiscal stimulus. Yet while forecasts from Fed officials suggest roughly three rate hikes could come this year, futures markets see only two, based on probabilities. 'Rates need to rise more briskly than markets now seem to expect,' Richmond Fed President Jeffrey Lacker, a long-time proponent of tighter monetary policy who is retiring in September, said..."

February 14 - Bloomberg (Rich Miller): "Federal Reserve Chair Janet Yellen set a relatively high hurdle for shrinking the central bank's balance sheet, leading some analysts to conclude that such a move won't occur this year. She told the Senate Banking Committee... that the Fed's focus was on raising interest rates to keep the economy in balance, and not on reducing its holdings of bonds. Rates first need to reach sufficiently high levels that the Fed feels it has some room to cut them to offset a weakening economy. Only then would the central bank begin to shrink its $4.5 trillion balance sheet, she said. 'What we would like to do is to find a time when we judge that our need to provide substantial accommodation to the economy in the coming years is minimal,' she said."

Japan Watch:

February 13 - Bloomberg (James Mayger and Garfield Clinton Reynolds): "Governor Haruhiko Kuroda once chuckled that the Bank of Japan had only gobbled up half as much in government bonds as the Bank of England once did. It soon won't be a laughing matter. The BOJ holds more than 40% of Japanese government bonds... The BOJ snapped up a record 2.1 trillion yen ($18bn) of five- to 10-year JGBs between Feb. 3 and Feb. 8 -- buying on three out of four trading days."

February 14 - Reuters (Leika Kihara): "The Bank of Japan must lay the grounds for exiting its massive stimulus program by slowing asset purchases and raising its long-term interest rate target to 0.5% this year, a former central bank policymaker said... With its huge buying distorting the bond market, the BOJ should start phasing out its stimulus... former board member Sayuri Shirai said. She said that to avoid having to top up an unsustainable pace of bond buying, the BOJ may have to raise its 10-year government bond yield target to 0.5% this year - from around zero - as global bond yields and domestic inflation pick up."

Leveraged Speculation Watch:

February 14 - Reuters (David Randall): "The winning bets come as equity hedge funds gained 2.1% in January, the strongest start to a calendar year for the industry since 2013, according to Hedge Fund Research. Total assets under management in the hedge fund industry reached $3.02 trillion at the end of the fourth quarter..."

Geopolitical Watch:

February 12 - Bloomberg (Kanga Kong and Isabel Reynolds): "President Donald Trump will be forced to deal with ongoing threats from North Korea as that country gains the ability to threaten the continental U.S. with a nuclear strike, an official said... hours after Pyongyang fired a ballistic missile into nearby seas. North Korea will probably develop its ballistic missile technology enough to pair with its nuclear weapons to reach the U.S. during Trump's tenure, said Richard Haass, president of the Council on Foreign Relations. Either the U.S. gets the Chinese to help increase pressure on North Korea through sanctions, or Trump will have 'a truly consequential decision'..."

February 13 - Reuters (Ben Blanchard): "China's Foreign Ministry expressed concern on Monday after Japan got continued U.S. backing for its dispute with Beijing over islands in the East China Sea during a meeting between U.S. President Donald Trump and Japanese Prime Minister Shinzo Abe. A joint Japanese-U.S. statement after the weekend meeting in the United States said the two leaders affirmed that Article 5 of the U.S.-Japan security treaty covered the islands, known as the Senkaku in Japan and the Diaoyu in China. Chinese Foreign Ministry spokesman Geng Shuang said China was 'seriously concerned and resolutely opposed', adding that the islands had been China's inherent territory since ancient times. 'No matter what anyone says or does, it cannot change the fact that the Diaoyu Islands belong to China, and cannot shake China's resolve and determination to protect national sovereignty and territory'..."

February 15 - Reuters (Philip Wen and Matthew Tostevin): "China's Foreign Ministry... warned Washington against challenging its sovereignty, responding to reports the United States was planning fresh naval patrols in the disputed South China Sea. On Sunday, the Navy Times reported that U.S. Navy and Pacific Command leaders were considering freedom of navigation patrols in the busy waterway by the... Carl Vinson carrier strike group..."


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