(…) So should we be prepared for another US recession in the near future? That’s the question Jonathan Roth asked Rosenberg in the enclosed interview.
“I think what people should be focused on is the shape of the yield curve,” Rosenberg said. “[Every] single inversion of the yield curve, where short-term rates go above long-term interest rates, has presaged a recession—every single time.” (…)
(…) Six months after forming an unprecedented coalition of 24 nations and delivering output reductions that exceeded all expectations, resurgent production from U.S. shale fields has meant oil inventories remain well above the level targeted by OPEC. While stockpiles are shrinking, ministers acknowledged the surplus built up during three years of overproduction won’t clear until at least the end of 2017. The group is prepared for a long game.
“We’ve said we’ll do whatever is necessary,” Saudi Oil Minister Khalid Al-Falih said Thursday after the meeting in Vienna. “That certainly includes extending the nine months further. We’ll cross that bridge when we get to it.”
Al-Falih said the cuts are working, adding that stockpile reductions will accelerate in the third quarter and inventory levels will come down to the five-year average in the first quarter of next year. While he expects a “healthy return” for U.S. shale, that won’t derail OPEC’s goals and a nine-month extension will “do the trick,” he said. (…)
The Daily Shot offers 2 important charts:
- The current OPEC cuts, while significant, are smaller than what we saw during the previous cycles.
Many large non-shale production projects will be coming online over the next few years.
China Exerts More Control Over Its Currency With Tweak to Yuan Fix China’s central bank is taking greater control over the yuan by changing the way it sets its official value against the U.S. dollar, its latest effort to prevent big swings in the currency’s value as economic worries mount.
The People’s Bank of China intends to add a “countercyclical factor” in the model it uses to fix the yuan’s daily rate, according to a statement from the China Foreign Exchange Trade System, the currency-trading arm of the People’s Bank of China. The purpose of the tweak, which has been in effect on a trial basis in recent days, is to smooth out fluctuations against the dollar, the statement said. (…)
These measures mark a shift in tactics from last year, when the central bank focused on guiding the yuan lower against the dollar in an orderly fashion. Behind the current emphasis on curbing the yuan’s fluctuations is a Chinese leadership that puts priority on economic and political stability ahead of a leadership shuffle later this year. Beijing also wants to avoid increased trade friction with Washington after President Donald Trump accused China of exploiting the yuan’s value to help Chinese exporters. (…)
Source: Danske Bank, @joshdigga (via The Daily Shot)
White House budget director Mick Mulvaney told a Senate committee that the administration’s tax plan doesn’t bank on any revenue stemming from faster economic growth. Four floors below that hearing, Treasury Secretary Steven Mnuchin gave a contradictory answer to a different Senate panel, insisting that the administration’s tax plan will partly pay for itself with economic growth. (…)
And the apparent disagreement isn’t academic; it is central to the administration’s fiscal policy. The Trump administration’s simultaneous promises of a balanced budget, economy-boosting tax cuts and accurate accounting are proving difficult to reconcile with each other. (…)
(…) “When I made my comments in 2013 at the IMF they were couched with very substantial doubts. Today I would have fewer. The essence of my argument then was that because of a variety of structural factors the neutral rate of interest was much lower than it had been and, therefore, getting to an adequately low rate was going to be more difficult. And that was going to act as a constraint on aggregate demand much more of the time than people thought. Relative to the prevailing forecasts at the time that I spoke, interest rates have been very substantially lower. Growth has been very substantially lower. Inflation has been very substantially lower for the industrialized world. Fiscal policy has been more expansionary. So the broad argument that I was making at that time seems more true today.” (…)
“One thing you should pay attention to is the yield on 10-year TIPS [Treasury Inflation-Protected Securities] because I think the interesting part is not the short-run dynamics but averaging over the cycle. If you look at the real interest rate decade by decade, it’s been going down for five decades.”
“I would be trying to raise R-star [another term for the neutral rate] so I would be wanting to operate with a different fiscal-monetary mix. Even though some of the things the Trump administration is doing are giving it a bad name, the basic impulse that increased business confidence that raises the propensity to invest is a good thing. So, first, more public investment I think is a good thing.” (…)
Labels Matter: What to Call the Stock Rally “Trump Trade,” “Reflation Trade” or “Liquidity Trade”?
(Mohamed A. El-Erian)
(…) Under the Trump trade, you would load up on U.S. industrials, financials and the dollar, while shorting Treasuries. Under the Reflation Trade, you would take a much more global equity exposure. Under the Liquidity Trade, you would seek to gradually reduce investment dollars at risk, while rotating more of the remaining market exposure to lagging international market segments. (…)
How about the “Tech Trade” as the FT wrote yesterday:
Or the “Top 5 Trade” as Bespoke Investment points out today:
(…) how much of the market’s gain is attributable to the largest stocks? Below we show three series. The light blue line is returns for the S&P 500 YTD. In the dark blue line, we strip out the performance contribution of the five largest stocks in the S&P 500: Apple (AAPL), Facebook (FB), Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOGL). As shown, while the overall index is up almost 8% so far in 2017, it’s up only 4.6% if you strip out the five largest stocks. In the red series below we show the spread between the two, in other words, the cumulative performance contribution from those 5 stocks. At the start of the year, these five stocks accounted for 11.6% of the index’s market cap, so you’d expect a non-trivial percentage of gains to come from them. That share stands at about 13.7% today. Generating nearly half of the index’s gains with less than 15% of its market cap is an out-sized contribution and shows just how painful it can be in terms of relative performance if you’ve been underweight these mega-Tech behemoths.
Or the “MAGNAFicient Trade” as per my May 18 post THE SIX-HORSE HITCH
(…) There certainly is no reason to panic when it comes to Canada’s major banks. They lend to much higher-rated borrowers than nonbank lenders like Home Capital. Around 60% of Canada’s mortgage market also is insured, either by a government agency or two private insurers, notes Keefe, Bruyette and Woods analyst Brian Klock.
Four of Canada’s five largest banks have reported quarterly earnings in the last two days. Three of them— Royal Bank of Canada ,Canadian Imperial Bank of Commerce , andToronto-Dominion Bank —beat analyst expectations. Delinquency ratios on their mortgages are remarkably low at around 0.25%.
Nonetheless, there is cause for concern. Total exposure to mortgages is high, averaging one fifth of assets at the five largest banks. (…)
Canadian banks have enjoyed a reputation for soundness since they emerged relatively unscathed from the 2008 crisis. Now, though, they hold lower levels of capital than their counterparts south of the border. The big five Canadian banks boast an average common equity tier 1 capital ratio of 11.2%, compared to 11.9% for the four largest U.S. banks.
Canadian banks’ shares are also much more expensive. The big five trade at an average 1.79 times book value, compared to 1.15 for the U.S. big four. (…)
Two observations on this:
- The chart below illustrates Canadian bank loss ratio since 1990. The dotted line is residential mortgages. The 1990-95 period marked a deep and long recession in Canada (chart from Scotiabank)
- When comparing P/BV, one needs to also compare returns on book values (ROE). U.S. banks average ROEs of 8.9% (regional banks) and 9.5% (diversified banks). Canadian banks ROEs average 15.5%, 1.7 times above the U.S. while their P/B are 1.5 times higher.
(…) “The Germans are bad, very bad,” Trump told EU officials in a closed-door meeting, Der Spiegel reported, citing unidentified attendees. “Look at the millions of cars that they sell in the U.S. Terrible. We’re going to stop that.” (…)
CORRELATION IS NOT CAUSATION
Source: @jsblokland, @simonjhix, @soccerquant (via The Daily Shot)