by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Equities are modestly lower in a quiet news environment.  The big story remains in the long end of the yield curve as the 10-year T-note yield falls below 2.40%.  Here is what we are watching this morning:

Why are bonds rallying?  We suspect there are two factors sending yields lower.  First, expectations toward monetary policy have flipped.  The market expects the next move by the FOMC will be to lower rates.  Stephen Moore, the president’s most recent nominee for Fed governor, is calling for an immediate rate cut of 50 bps.  Although none of his future colleagues are supporting him (so far), assuming he is confirmed, he will be a consistent voice in favor of rate cuts.  It should be noted there is an international element to this trend.  ECB President Draghi indicated today that his bank is prepared to support the Eurozone economy by delaying policy tightening.[1]  Second, there are growing fears that the economy is not only slowing but may be stumbling.  With inflation low and economic data weak, there is an incentive for safety assets.  To some extent, the rally in bonds is starting to look like a momentum trade, which probably means it’s getting overdone.  Reversing the rally will require improved economic data.

Brexit: The “indicative voting” process begins today and will likely continue into tomorrow.[2]  Sixteen different proposals are being considered.  None are binding on the government; however, if any get overwhelming support (which isn’t likely) then PM May would be forced to either support the proposal or resign.  Champions of Brexit are coming to the realization that May’s plan may be the best they can get, so there has been some talk of simply accepting the May plan.[3]  Overall, we doubt anything definitive comes out of this process; if we are correct, the odds of a long delay are increasing.

Bouteflika out?  The current president of Algeria appears to be losing support of the military.  The army chief of staff, Gen. Ahmed Salah, is now openly calling for the president to be removed.[4]  Bouteflika has suffered a series of strokes and is, by most accounts, incapacitated.  So, if the military has decided that he is finished then it probably means the end is near.  A peaceful transfer of power in Algeria is important; the country is a member of OPEC and a significant supplier of natural gas to Europe.

An update: Earlier this month, we reported that a shadowy dissident group had broken into North Korea’s embassy in Madrid as President Trump and Chairman Kim Jong-un were meeting in Hanoi.  Apparently, the leader of the “operation,” a Mexican national living in the U.S., Adrian Hong Chang, fled to Portugal after the raid and flew back to the U.S.  An American, Sam Ruy, was also involved.  Spanish officials have issued international arrest warrants for both men.  According to reports, the group has offered materials seized in the raid to the FBI.  U.S. security officials have declined to comment.[5]

Turkey and the lira shorts: In the run-up to elections, Turkey has sent overnight interest rates to nosebleed levels, around 300%, to punish currency shorts.  To short a currency, a trader essentially borrows in the currency he is shorting.  The high interest rates are making shorting really expensive, reducing the attractiveness of such activity.  Obviously, it will be impossible to continue such high interest rates indefinitely.  At some point, those overnight rates will begin to affect other areas of the Turkish yield curve.  But, in the short run, the move will stabilize the lira, which has been under pressure recently.[6]

The return of the exurbs:The WSJ reports that housing development away from urban centers has been showing signs of life, adding to evidence that the housing market is continuing to recover.[7]  The article suggests that even younger buyers, who up until now have opted for urban rental property, are following the path of their parents and grandparents and moving out of the cities for cheaper housing after starting families.

View the complete PDF

[1] https://www.cnbc.com/2019/03/27/ecb-president-mario-draghi.html

[2] https://www.ft.com/content/03c149f2-4f01-11e9-9c76-bf4a0ce37d49?emailId=5c9b0c3905985700040ff276&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[3] https://www.ft.com/content/097b854c-4fb5-11e9-9c76-bf4a0ce37d49?emailId=5c9b0c3905985700040ff276&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[4] https://www.nytimes.com/2019/03/26/world/africa/algeria-army-president-bouteflika.html?emc=edit_fd_20190327&nl=&nlid=567726720190327&te=1

[5] https://www.nytimes.com/2019/03/26/world/europe/spain-north-korea-embassy-attack.html?utm_source=POLITICO.EU&utm_campaign=ee67c38c08-EMAIL_CAMPAIGN_2019_03_27_05_51&utm_medium=email&utm_term=0_10959edeb5-ee67c38c08-190334489

[6] https://finance.yahoo.com/news/turkish-lira-swap-rates-erupt-095606557.html

[7] https://www.wsj.com/articles/a-decade-after-the-housing-bust-the-exurbs-are-back-11553610771?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosam&stream=top

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Equities are higher in a quiet news environment.  Here is what we are watching this morning:

Brexit: MPs voted 329/302 to take control of the House of Commons timetable, essentially removing the prime minister from running the process.[1]  Although this is no huge shock, it isn’t obvious whether the MPs will have any better ideas.  Parliament will begin holding a series of “indicative votes”[2] tomorrow to test out various ideas, which include combinations of May’s plan plus joining the customs union to a hard exit or another referendum.  PM May remains defiant, suggesting she may not implement whatever Parliament decides.  She can certainly threaten, but if she defies the will of Parliament she will almost certainly trigger a vote of no-confidence and an ouster.  New elections cannot be ruled out.  As it sits now, it looks to us like the most probable outcome is a long extension of the deadline.  That’s about the only thing that likely has a majority of support.  Such an outcome is modestly supportive for the GBP.

Bond bull market: Fears of recession and the lack of inflation have pushed the 10-year T-note yield below 2.50%.  We are starting to see other effects from this rally in bond prices.  First, the amount of global bonds with a negative yield hit $10 trillion, up from $6 trillion late last year.[3]  The German 10-year Bund fell back into negative territory.  Second, the BOJ is now talking about further monetary stimulus.[4]   It is hard to see how taking rates below zero would stimulate growth; about the only factor that might boost the economy is a weaker yen, but that would get Japan in trouble with the Trump administration.  Third, Fed policymakers are resurrecting the “operation twist” idea, where the Fed buys more short paper to steepen the yield curve.[5]  Monetary policy is a spent force at this point, with the only remaining stimulative tool being fiscal spending.

Bolton v. Pompeo:Although both are considered Iran hawks, there is a split between them on implementing Iranian oil sanctions.[6]  Pompeo wants to extend oil waivers to at least some of the eight nations that were initially granted waivers.  In fact, China and India, which are currently receiving waivers, would probably continue to buy Iranian oil regardless of U.S. actions.  On the other hand, not extending waivers would almost certainly weaken the terms for Iran on the oil it sells to India and China.  Pompeo wants to extend waivers, while Bolton wants to end them.  The other consideration is the price of oil; the Trump administration has made it clear it wants low oil prices and ending waivers would likely lift prices, at least initially.  Saudi Arabia, in defiance of the U.S., continues to support $70 Brent prices.[7]  Thus, if the waivers are ended, we would not expect OPEC to immediately step in to cover any shortages.  However, history also shows that cartel discipline tends to weaken as prices rise.

View the complete PDF

[1] https://www.ft.com/content/cdfb086e-4f03-11e9-9c76-bf4a0ce37d49?emailId=5c99a9761d433300045767bb&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[2] https://www.ft.com/content/03c149f2-4f01-11e9-9c76-bf4a0ce37d49?emailId=5c99a9761d433300045767bb&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[3] https://www.ft.com/content/b131da2e-4f02-11e9-b401-8d9ef1626294?shareType=nongift

[4] https://www.reuters.com/article/us-japan-economy-boj/global-strain-stirs-boj-debate-of-more-easing-in-march-idUSKCN1R701O

[5] https://www.reuters.com/article/us-usa-fed-rosengren/fed-should-consider-holding-more-short-term-bonds-rosengren-idUSKCN1R7021

[6] https://www.bourseandbazaar.com/news-1/2019/3/26/trump-team-split-over-iran-oil-waivers-as-next-deadline-nears

[7] https://www.reuters.com/article/us-saudi-oil-prices-analysis/more-shale-who-cares-saudi-arabia-pushes-for-at-least-70-oil-idUSKCN1R31IP

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Equities have lifted from their overnight lows on a better than expected German IFO business sentiment index report.  Although the Mueller news didn’t have any impact on financial markets, a finding of collusion would have been majorly negative, so that problem has been avoided.  Here is what we are watching this morning:

A signal for the Fed: We use the implied rate from the three-month Eurodollar futures, two years deferred.  Essentially, it is the market’s projection for LIBOR two years from now.  It has had an uncanny ability to signal what monetary policy “should” do.  Over the past week, a clear signal has emerged—the Fed needs to cut rates now.

The green line shows the implied LIBOR rate, the red line is the policy rate and the blue line shows the spread.  We have placed vertical lines at points of earlier inversions.  The genius of the Greenspan Fed was that he tended to cut rates quickly when the blue line fell below zero.  Although there is no record of the FOMC using the above chart signals for policy, it is essentially a yield curve analysis, which policymakers closely monitor.  The Bernanke Fed stopped raising rates at the point of inversion but was slow to cut, which probably led to the 2007-09 recession.  The Powell Fed is now facing a similar situation.

Given the state of flux in the underlying theories of policy, it might be possible for Powell to push the committee to cut rates.  But, given how rapidly the Fed has moved from tightening in December to steadying by March, taking the next leg to cut might be too difficult for Powell to manage.  Although this inversion doesn’t mean recession is imminent, it does suggest that the odds of a recession are significantly higher than they were just a few months ago.

Brexit: We are expecting a series of votes this week that probably won’t clear up anything.  The problem is that there is no consensus in Parliament on a way forward.  The situation in the legislature likely reflects conditions among the electorate.  Over the weekend, there were large marches in London for a second referendum.[1]  Meanwhile, Brexit fatigue has led to sentiment for a hard Brexit just to end the eternal drama.[2]  PM May faced pressure to resign over the weekend, which she managed to fend off, but the chances of her ouster remain elevated.[3]  The GBP is holding its own with the current delay in place, but there is still the potential for the U.K. to stumble into a sudden break with the EU, which, at least in the short run, would probably be devastating for the U.K. economy.

Chinese trade talks: Although negotiations continue, China is not bending on technology.[4]  We do believe both President Trump and General Secretary Xi need a deal, but they may be misjudging who needs it more.  If the talks break down, equities will not take it well.

Stephen Moore for Fed Governor: President Trump tweeted that he will nominate Stephen Moore for one of the open governor positions on the FOMC.  There has been rather strong pushback from both the establishment right and left.[5]  We view this announcement as further evidence that the president is becoming more comfortable with his office.  He followed the advice of Treasury Secretary Mnuchin on Powell, Clarida and Liang.  Trump has found all of them wanting because he doesn’t want a technocrat at the Fed; he wants a loyalist.  Moore has pressed for Powell to cut rates; during the Obama administration, he argued the Fed should have raised rates to avoid hyperinflation.  Although mainstream economists will oppose Moore’s appointment, we don’t expect the Senate to turn it down.

We are in the very early stages of moving the Fed from an independent technocratic body to a more politicized one.  This shift is probably inevitable due to the desire to reflate the economy.  An independent Fed will tend to be more concerned about containing inflation, which is not what the populist uprising wants.  Although reflation will take some time, the signs are all in place—trade wars, immigration opposition and now changes at the FOMC.

Italy joins the Belt and Road project: Italy welcomed President Xi and signed a MOU to join the Belt and Road project.[6]  Although the actual impact probably isn’t going to be a big deal, the symbolism is huge.  This is the first G-7 nation to join the project.  Italy’s economy has struggled within the Eurozone and it would like to get support from the outside.  China is undermining the U.S.-led order, in part, because the U.S. is less interested in the “care and feeding” of that order.  It still isn’t obvious that China has the economic heft to generate a new world order, but it can clearly weaken the current one.

View the complete PDF

[1] https://www.nytimes.com/2019/03/23/world/europe/brexit-march-london.html

[2] https://www.nytimes.com/2019/03/23/world/europe/brexit-no-deal-may.html?emc=edit_mbe_20190325&nl=morning-briefing-europe&nlid=567726720190325&te=1

[3] https://www.ft.com/content/d8406b52-4e63-11e9-9c76-bf4a0ce37d49?emailId=5c9856b76556bf0004796230&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[4] https://www.ft.com/content/ffd51efe-4d9d-11e9-b401-8d9ef1626294?emailId=5c9856b76556bf0004796230&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[5] http://gregmankiw.blogspot.com/2019/03/memo-to-senate-just-say-no.html and https://www.politico.com/story/2019/03/22/trump-fed-job-stephen-moore-1232529

[6] https://www.ft.com/content/00d56f1a-4b10-11e9-8b7f-d49067e0f50d?emailId=5c931623bcd2b90004d98730&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Good morning! Equity markets are mixed today following weak manufacturing data in Europe and the president’s hints that a trade deal with China is close to fruition. Below are the stories we are currently monitoring:

Brexit extension: On Thursday, the Financial Times reported that the EU is preparing to offer the UK an extension on Brexit on the condition that MPs approve a withdrawal agreement next week. According to reports, the EU would agree to an extension of May 22, the day before the European Parliamentary elections, on the condition that May is able to gain parliamentary support. However, if the U.K. Parliament rejects May’s offer then the EU would consider an extension of nine months. If this longer extension occurs, then the UK will be required to participate in the EU elections. Brexiteers are furious at the prospect of the U.K. participating in EU elections following the country’s decision to withdraw from the EU. As a result, we would not be surprised if more Brexiteers end up supporting PM May’s deal.

Venezuela’s “big stake”? The Trump administration hinted at possible retaliation against President Nicolas Maduro following the arrest of Robert Marrero, the Chief of Staff of opposition leader Juan Guaido. This move by Maduro will likely escalate tensions between the U.S .and Venezuela as Maduro grapples with staying in power in light of crippling U.S. sanctions. Tensions have been running high between the two countries following the U.S. decision to recognize Juan Guaido as the legitimate leader of Venezuela. Following this decision, the U.S. has maintained that there will be severe consequences for the Maduro regime if Guaido or anyone in his inner circle is harmed. At this point, the administration has been ambiguous about what its response will be, but has vowed that Maduro’s actions “will not go unanswered.”

Flood season: The National Oceanic and Atmospheric Association stated in its Spring Outlook report that the U.S. is likely to see “historic and widespread flooding” in May. If this occurs, it will be bad news for farmers who have been stockpiling crops in anticipation of a possible trade deal with China and are still recovering from the bomb-cyclone that hit two weeks ago. Federal regulations prevent the selling of crops that have been tainted by flood waters, which will likely result in farmers absorbing losses of some of their excess inventories. As a result, we expect the price of crops to be relatively high over the summer as poor weather conditions will have a negative impact on supply.

North Korea:Following months of progress, it appears that denuclearization talks between the U.S. and North Korea may be on the brink of breaking down. Last week, it was reported that North Korea was considering walking away from negotiations following the summit in Hanoi that saw both sides leave without an agreement. Speculation was further stoked today after North Korea decided to withdraw from a shared liaison office with South Korea following the U.S. decision to sanction two Chinese shipping companies. The sticking point in negotiations appears to be North Korea’s insistence that sanctions be removed before it decides to completely denuclearize, while the U.S. maintains that sanctions will only be removed once there is proof the country has completely denuclearized. Furthermore, there are reports that North Korea has been able to avoid sanctions with the help of China. At this point, it is unclear what the next steps are but we will be closely monitoring the situation.

View the complete PDF

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Bond yields continue to decline while equities come under pressure.  Here is what we are watching this morning:

The FOMC: A dovish outcome was expected and the Fed delivered.  First, the dots plot was lowered, projecting no rate changes this year and only one more rate increase next year.  On the chart below, December is in gray and March is in yellow with a green line.

Here is another way of looking at the evolution of the dots.  On the chart below, the December meeting is shown as large dark blue dots and yesterday’s meeting is in red.  Note the significant decline in projections.  The history of the dots makes very clear that the FOMC thought a normal recovery would develop and support a return to “normal” fed funds levels.  Continued low inflation has prevented the FOMC from moving the target rate higher.

Second, in the statement, the FOMC acknowledged the slowdown in growth and low inflation.  The economic expectation data showed that the committee is forecasting GDP less than 2% for the foreseeable future with controlled inflation.  In general, there is no reason to lift rates.

And third, the Fed will likely end QT in September.  Again, we view this change as mostly psychological but, in the bigger scheme of things, reducing the balance sheet was unnecessary.  Simply holding it steady would have reduced its impact over time (e.g., its share of GDP would have declined), so QT was, to some extent, a kind of “unforced error.”

Although equities rallied initially, the lift failed to hold as financials suffered.  Long-duration bond yields fell and the dollar weakened as well.  To a great extent, equity markets had already discounted more dovish policy.  However, without a steepening yield curve and dollar weakness, a major lift in stocks will require a pop in earnings.

There has been some discussion by financial pundits that the Powell Fed is caving into the financial markets but the move in policy may have more to do with fears of an economic downturn.  We note that the OECD’s broad leading indicator and the U.S. leading indicator are showing signs of weakness.

And, comparing the NY FRB yield curve-based recession indicator with the Atlanta FRB GDP recession indicator warns of trouble ahead.

The NY Fed indicator gives us a year lead; any reading above 20 is a cause for concern.  The two combined indictors are rather powerful.  This tells us that the U.S. needs to steepen the yield curve if the U.S. is going to avoid a recession.  And, history shows the normal way to have this occur is for policy to ease.  The expectation of one more hike in 2020 from the dots plot suggests the FOMC isn’t quite ready to lower rates.

From our perspective, the continued rally in long-duration Treasuries is a concern.  If investors were concerned about inflation, the dovish Fed policy change would have caused higher long-term rates.  The fact that long rates are continuing to decline suggests no inflation fear and greater worries about weaker economic growth.

Brexit: We realize this topic is really getting old but the drama is unending.  It’s pretty clear there is no consensus in Parliament.  PM May’s plan all along was to eliminate other alternatives and have a vote on her deal or a hard Brexit.  It appears she will now get her wish.  The EU has made it clear that it will grant a short extension to the Article 50 deadline only to give U.K. MPs more time to vote on May’s plan.[1]  Otherwise, it’s a long delay or hard Brexit.  May is wagering that the hard Brexit supporters will prefer her deal to a long delay.[2]  However, there is an element within the Tory Party that would welcome a hard Brexit.[3]  Their position seems to be that the expectations of a sudden break are dire but the outcome probably won’t be as bad as expected and thus a hard Brexit would end up being ok.[4]  In addition, the hard Brexit supporters have tended to believe the EU will blink.  Then again, it appears to us that the EU is better prepared and has more to benefit from a hard break than the British supporters realize.  The hard Brexit supporters also believe that the U.K. can quickly make free trade deals with other nations, including the U.S.  They will likely be shocked at how hard a bargain the U.S. will drive; we doubt U.S. negotiators would tolerate any restrictions on American agriculture, for example.

We still think the odds favor some outcome that avoids a sudden break.  But, it is also clear that this outcome won’t occur until the last minute and the odds of stumbling into a crisis are rising.

Auto tariffs: The Commerce Department has submitted its report to the president on auto tariffs; this triggered a 90-day review period where the president can decide if he wants to implement them.  So far, the White House has refused to distribute the findings despite requests from Congress.[5]  The concept of auto tariffs are generally panned among his advisors, with the exception of Peter Navarro.  The problem is that the auto industry is deeply globalized; tariffs by the U.S. will invite retaliation and could very well paralyze the industry and lead to a sharp downturn in industrial activity.  The auto tariffs are especially critical to EU/U.S. trade talks.[6]  Although we still expect the administration to make a short-term deal with China and avoid a significant disruption, the EU talks could become the next trade-related disruptive event.

Energy update: Crude oil inventories fell 9.6 mb last week compared to the forecast rise of 2.0 mb.

In the details, refining activity rose 1.3% as winter maintenance steadily ends.  Estimated U.S. production rose 0.1 mbpd to 12.1 mbpd.  Crude oil imports rose 0.2 mbpd, while exports rose 0.9 mbpd.

This is the seasonal pattern chart for commercial crude oil inventories.  We would expect to see a steady increase in inventory levels that will peak in early May; the pattern coincides with refinery maintenance.  The continued decline puts the market further behind the storage injection curve and is bullish.

Based on oil inventories alone, fair value for crude oil is $60.78.  Based on the EUR, fair value is $53.37.  Using both independent variables, a more complete way of looking at the data, fair value is $55.25.  We are seeing widening fair value readings on the two individual models, with oil stocks very supportive for prices while the dollar is not.  The Fed news could weaken the dollar which could lift oil prices as well.  Although we may see a push over $60 in the near term, a sustained rally will probably need some dollar weakness to maintain the rise.

View the complete PDF

[1] https://www.ft.com/content/971250a4-4ae0-11e9-8b7f-d49067e0f50d?emailId=5c931623bcd2b90004d98730&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22 and https://www.nytimes.com/2019/03/20/world/europe/theresa-may-brexit-european-union.html?emc=edit_mbe_20190321&nl=morning-briefing-europe&nlid=567726720190321&te=1

[2] https://www.reuters.com/article/us-britain-eu-deal/may-has-a-good-shot-of-getting-brexit-deal-approved-next-week-uk-junior-minister-idUSKCN1R20OF

[3] https://www.ft.com/content/3d6f76da-4b1c-11e9-8b7f-d49067e0f50d?emailId=5c931623bcd2b90004d98730&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[4] https://www.ft.com/content/1376ce46-4b2b-11e9-8b7f-d49067e0f50d?emailId=5c931623bcd2b90004d98730&segmentId=22011ee7-896a-8c4c-22a0-7603348b7f22

[5] https://www.politico.com/story/2019/03/20/trump-tariffs-automobiles-commerce-1228344

[6] https://www.cnn.com/2019/03/20/politics/eu-talks-trump-tariffs/index.html

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Happy Fed Day!  The FOMC finishes its meeting today.  Other than that, markets are very quiet.  Here is what we are watching this morning:

The FOMC: As we noted on Monday, the financial markets have the Fed on hold for the foreseeable future.  This is a quarterly meeting, so we will get dots; the financial markets will be looking to see if their position on steady policy is confirmed by the committee.  There are also expectations that the Fed will establish a terminal level for the balance sheet.  While we continue to have doubts that the balance sheet matters all that much (excess reserves sit idle on bank balance sheets, earning just below fed funds), it will matter psychologically.  The market hopes QT ends in the fall.  We would expect a modest downgrade in economic expectations and no change in the inflation target.[1]  We do have one concern about today’s meeting—expectations have turned so dovish that there is almost no chance of a bullish surprise and any hint of worry about inflation or disappointment on the balance sheet could lead to a bearish reaction.  It’s not a long-term issue, but it could affect today’s trade.

Kazakhstan: Nursultan Nazarbayev, the only president in the 28-year history of the country, announced his resignation yesterday.[2]  Although he had indicated he was planning to resign at some point, his signals were generally ignored given that he is in good health.  At the same time, the news isn’t all it seems.  Nazarbayev intends to maintain control over the security apparatus, meaning the next president will not have the same degree of control.  Kazakhstan has a resource-dependent economy; oil represents about 35% of the country’s GDP and 75% of its exports.  The currency has steadily depreciated during Nazarbayev’s reign, with a large drop in 2015 as oil prices fell.

Geopolitically, Kazakhstan faces two major threats, Russia and Uzbekistan.  Russia likes to keep its former Soviet regions under control (see Belarus, Georgia and Ukraine as examples), and Uzbekistan has the largest population of any of the “stan” nations.  Recent regulatory changes in Uzbekistan, which make foreign investing easier, are lifting the Uzbek economy and may pose a threat to Kazakhstan’s economic dominance of the former Soviet “stan” states.

Nazarbayev has stayed in power by balancing various powerful factions within Kazakhstan, including the head of the energy sector and the security forces.  He is expected to promote the status of family members in the transition.[3]  As long as Nazarbayev remains active in the country’s political system, Kazakhstan will remain stable.  However, once he exits the scene, a period of instability is likely.

Brexit: PM May’s plan to keep running her Brexit deal in front of MPs until they blinked was scotched by Speaker Bercow yesterday.  May announced she would see a 90-day extension simply to avoid a chaotic exit.  May’s government is trying to determine how to get around Bercow’s decision.  They could ask MPs to secure a majority and ask Bercow to allow for a third vote.  Although we expect Bercow to allow another vote in the face of a majority, it isn’t obvious that May can muster one.  May could end this parliamentary session and call another one.  Or, the Queen could prorogate the current parliament and bring a new session.  All these outcomes are possible, but long shots.  The market’s take is that an extension will occur but, with the deadline looming in a mere nine days, the chances of a hard break are still active.

Chinese debt defaults: China’s private sector debt defaults jumped in 2018 to $23.8 bn, up fourfold from 2017.[4]  Although the increase is a bit jarring, total non-financial corporate debt is around $13.0 trillion, so the amount, on its own, is clearly manageable.  However, credit quality in China remains a concern because the government tends to foster growth levels that require increasing levels of debt.

Japan downgrades economy: Japan downgraded its assessment of the economy for the first time in three years, citing the U.S./China trade dispute.[5]  Global growth has been slowing and Japan’s announcement simply confirms the weakness.

View the complete PDF

[1] For our take on the inflation target issue, see the Asset Allocation Weekly (3/8/19).

[2] https://www.ft.com/content/7bff2594-4ab8-11e9-8b7f-d49067e0f50d

[3] https://www.ft.com/content/beeb26dc-4af9-11e9-8b7f-d49067e0f50d

[4] https://www.cnbc.com/2019/03/20/chinese-companies-had-record-amount-of-corporate-bond-defaults-in-2018.html

[5] https://www.reuters.com/article/us-japan-economy-report/japan-government-downgrades-economy-view-as-u-s-china-trade-war-bites-idUSKCN1R10SD?stream=business&utm_campaign=newsletter_axiosmarkets&utm_medium=email&utm_source=newsletter