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The latest downshift in global macro data is providing a not so subtle reminder of the pernicious effect the protracted US-China trade war is having on the worldwide economy.
Gold is still trading well above its August 1 low, but with Treasury yields headed toward their August 1 high of 2.06 percent, a move into this level could trigger another steep drop in gold to at least $1412.10.
Stocks pared losses and ended mixed after a report from Reuters that a meeting between President Donald Trump and China’s Xi Jinping could be pushed back until December.
Budget deficits do matter, Paul Tudor Jones said on Tuesday, arguing that governments cannot print money in perpetuity without consequences.
(Bloomberg) -- Explore what’s moving the global economy in the new season of the Stephanomics podcast. Subscribe via Pocket Cast or iTunes.The worst may be over for the world economy’s deepest slowdown in a decade.A wave of interest-rate cuts by central banks including the Federal Reserve and mounting hopes of a U.S.-China trade deal are buoying confidence in financial markets just as key economic indicators show signs of stabilization after recent declines.While a robust rebound may still not be on the cards, the relative improvement could put an end to the fears of just a few weeks ago that the world economy was barreling toward recession. Such an environment looks for now to be enough for Fed Chairman Jerome Powell and fellow monetary policy makers to take a pause from doling out monetary stimulus.“We do see multiple reasons for a stabilization in global growth in 2020 versus 2019,” said David Mann, chief economist for Standard Chartered Plc in Singapore, who shares the International Monetary Fund’s expectation that global growth will accelerate next year.Among the reasons for confidence: While JPMorgan Chase & Co.’s global manufacturing index contracted for a sixth month in October, it inched closer toward positive territory as both output and orders firmed.In the U.S., the Institute for Supply Management’s gauge of factory activity stabilized in October while the government’s jobs report on Friday showed payroll gains exceeded forecasts and hiring in the previous two months was revised much higher. The ISM’s gauge of services is also showing signs of improvement.In Europe, there are also tentative signs of health after it was squeezed by the trade war as well as Brexit. The euro-area economy expanded more than forecast in the third quarter and while Germany may already be in recession, the Ifo Institute reported that expectations among its manufacturers edged up in October.As for Asia, inventories of semiconductors in South Korea fell the most in more than two years in September in a sign a slump in global technology is ending.Financial markets are tuning into the optimism. U.S. stock benchmarks climbed to all-time highs on Monday and the yield on the 10-year Treasury note rose. European and Asian stocks have also advanced.“I just look at the fiscal/monetary mix, it’s the most stimulative that I think I’ve ever seen,” said billionaire hedge fund manager Paul Tudor Jones on Tuesday. “It’s no wonder that the stock market’s hitting new highs. It’s literally the most conducive environment, certainly in the short run, for economic growth and strength that I’ve ever seen.”One key reason for the potential turn is the wave of interest-rate cuts from global central banks. Of the 57 institutions monitored by Bloomberg, more than half cut borrowing costs this year with the Fed doing so three times and the European Central Bank pushing its deposit rate further into negative territory. Rate cuts also operate with a lag so the positive effects of easier monetary policy have yet to fully flow through, meaning a further impulse likely awaits.Powell last week hinted the U.S. central bank may be done reducing borrowing costs as he said the stance of policy was now “appropriate” to keep the economy growing moderately. “It would take a material change in the outlook for me to think that further accommodation would be required,” Fed Bank of San Francisco President Mary Daly said on Monday.Trade TalksAlso driving sentiment is that President Donald Trump and President Xi Jinping are on the cusp of signing “phase one” on a trade deal, which could be enough for global commerce to find a footing. China is reviewing locations in the U.S. where Xi would be willing to meet with Trump to sign a pact.Meantime, U.S. Commerce Secretary Wilbur Ross said Washington has also enjoyed “good conversations” with automakers in the European Union, raising hopes that the Trump administration may not slap tariffs on imported automobiles this month.Morgan Stanley economists reckon the contraction in global trade volumes likely narrowed in October, declining 0.6% compared to 1.3% in September. Retail, auto and semiconductor sales are all stabilizing, they said in a report this week.Deadline ExtensionElsewhere in Europe, the risks of a so-called no-deal Brexit have also diminished after the EU extended the deadline on the U.K.’s departure until the end of January and Prime Minister Boris Johnson called a December election in the hopes of breaking the impasse between politicians.The soft landing scenario isn’t fully sealed. In May, similar hopes were building, only for Trump to ramp up tensions with China. While Washington and Beijing have signaled they’re getting closer to agreeing on the first phase of a deal, it’s not clear whether trade talks would continue toward a comprehensive agreement.“If the U.S.-Chinese trade escalates again, or if the U.S. starts a new trade war against the only other economy of almost equal size, the EU, it could all still go wrong,” said Holger Schmieding, chief economist at Berenberg Bank. “But in the absence of such new political shocks, chances are that the global downturn could peter out in early 2020 and make way for a modest upturn thereafter.”The strength of any revival may ultimately depend on the health of China’s economy, which expanded in the third quarter at its weakest pace in decades and where evidence of a bottoming out in demand remains tentative.A gauge of Chinese manufacturing dropped this month to the lowest level since February while a measure of new export orders contracted at a faster pace. At the same time, construction, real estate, consumption and services are holding up, buoying expectations that officials are managing a gradual slowdown.To contact the reporters on this story: Enda Curran in Hong Kong at email@example.com;Paul Gordon in Frankfurt at firstname.lastname@example.orgTo contact the editors responsible for this story: Simon Kennedy at email@example.com, Vince GolleFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
U.S. stocks were little changed as investors weighed recent optimism over U.S.-China trade talks against the latest batch of corporate earnings results and economic data, much of which came in mixed.
Rising yields and demand for risk should continue to drive the USD/JPY higher on Tuesday, but their moves hinge on continued progress in the trade talks.
(Bloomberg Opinion) -- The Dow Jones Industrial Average finally joined the S&P 500 Index and Nasdaq Composite Index in setting new highs on Monday. The thing is, the moves appear to be less about optimism over things like growth in the economy or earnings than relief that things aren’t getting any worse.The gains came as the Commerce Department said durable goods orders fell 1.2% in September, in line with its initial forecast for a 1.1% decline. As for earnings, they are on track to show a drop of 1.8% for the third quarter, which is better than the 4% projected decline. “Not that it’s an unbelievable earnings season, but it’s been so much above expectations,” JJ Kinahan, the chief market strategist at TD Ameritrade, told Bloomberg News. Here’s another way to look at it, though: Earnings have exceeded analysts’ estimates by 3.8%, below the average of 5.2% over the last year and 4.9% the last five years, according to DataTrek Research. And that the so-called beat rate is down even though revenue growth is beating estimates, a sign profit margins are getting squeezed. As a result, analysts are cutting their fourth-quarter forecasts, taking them down by 2.8% during the month of October, which DataTrek points out is steeper than the typical reduction of 1.7% over the last five years.Equities also got a boost following a report that China is reviewing locations in the U.S. where President Xi Jinping would be willing to meet with Donald Trump to sign the first phase of a trade deal between the world’s two largest economies. Again, this is more relief that maybe the trade war won’t get any worse and drag on the global economy, rather than optimism that it would spur growth. As the JPMorgan Global Manufacturing Index showed on Monday, factory output shrank for a sixth straight month in October.BOND TRADERS BECALMEDWith stocks rallying not only in the U.S, but globally, the bond market naturally took a hit. The yield on the benchmark 10-year Treasury note jumped as much as 8 basis points, or 0.08 percentage point, for its biggest increase since Oct. 10. Still, at 1.79%, the yield is hardly signaling the all clear when it comes to the challenges facing the economy. This time last year, the median estimate of more than 50 economists surveyed by Bloomberg was for the yield to be between 3.42% and 3.49% by now. And it’s not like bond traders are expecting a sudden jump in yields that would accompany a brighter economic outlook. That can be seen in the rapid drop in Bank of America Corp.’s MOVE Index. The measure of anticipated implied volatility has had one of its steepest declines in years over the past four weeks, suggesting bond traders anticipate a period of relative calm in the market even though the Federal Reserve signaled last week that it is done cutting interest rates after three reductions since the end of July. As for what economists see now, they are calling for yields to hover around their current levels through the third quarter of 2020, before slowly creeping up and only breaching the 2% level in the second quarter of 2021. Higher yes, but hardly a level that suggests a buoyant economy.CENTRAL BANK STIMULUSLow bond yields globally have contributed much to the rally in equities worldwide. Simple discounted cash-flow analysis shows how lower rates make future earnings more valuable now, justifying higher multiples for equities even without profit growth. But don’t discount central bank largesse. In an effort to combat the global slowdown, major central banks have turned more dovish not just by lowering interest rates, but also by expanding their purchases of financial assets. Led by the Fed’s efforts to unclog the repo market by purchasing more Treasury bills, the collective balance-sheet assets of the Fed, European Central Bank, Bank of Japan and Bank of England rose by 0.6 percentage point to 35.7% of their countries’ total GDP in October, according to data compiled by Bloomberg. The increase from September was the most for any month since March 2017. “Global central banks have delivered an unusual late-cycle dovish pivot this year to extend an already-long economic expansion,” the strategist at the BlackRock Investment Institute wrote in their weekly commentary released Monday. But the firm and others note that major central banks are sending signals that they are hesitant of easing monetary policy further. “The decade-long era of large-scale monetary stimulus is coming to an end,” Mansoor Mohi-uddin, a senior macro strategist at NatWest Markets, wrote in a research note Monday. “Central bankers increasingly want fiscal policy to share the burden with monetary policy to support growth and inflation.”UN-PRECIOUS GEMSGold, up more than 17% so far in 2019, is enjoying its best year since 2010. This surge can largely be attributed to the big drop in interest rates and rising demand for so-called haven assets amid a slowing global economy. The same can’t be said of diamonds. True, precious gems aren’t exactly a tradeable asset like gold, and they are used mostly for retail transactions, but it’s still concerning that the market for diamonds appears to only be getting worse. De Beers is taking more drastic steps to stem the crisis in the diamond industry by cutting prices across the board for the first time in years. The world’s biggest diamond producer lowered prices by about 5% at its November sale, according to Bloomberg News’s Thomas Biesheuvel. Part of the problem in the diamond industry is that prices have stagnated as other luxury offerings, like shoes, handbags and resort vacations, crowd the field. It’s also harder for diamond-trading companies to find financing because banks are abandoning the sector after being hit by frauds and bad loans. The average price for a top-25 quality, 1 carat diamond with a clarity between internally flawless with no inclusions – or marks on the surface – to very slight inclusions has fallen 4.5% in 2019, putting the market on track for its seventh decline in the last eight years, based on the Rapaport Diamond Trade Index.REACH FOR YIELD ILLUSTRATEDFrontier markets are those that aren’t even developed enough to be considered an emerging market. These are places such as Mozambique, Pakistan and Jamaica. In other words, they’re not suitable for widows and orphans. And yet, these markets have been able to raise $3.2 trillion in the global debt market, according to a report issued Monday by the Institute of International Finance in Washington. The group said that more than two-thirds of the frontier economies it covers have total debt exceeding 100% of their gross domestic product, with borrowings at a record 115% of GDP overall. Although $3.2 trillion may sound like a lot – and it is - it’s actually a very small part of the total debt market, which exceeds $243 trillion. Nevertheless, the number is still pretty remarkable, underscoring just how much demand there has been for any type of debt offering premium yields in a world where some $14 trillion of bonds yield less than zero. And while frontier debt may not be considered systemic risk that could be a threat to the global financial markets, it still bears watching how easily these borrowers will able to refinance the $216 billion of debt coming due through the end of 2021.TEA LEAVESMarkets will get a very important update on the wealth of the consumer on Tuesday when the Institute for Supply Management releases its monthly services index for October. Unlike its manufacturing gauge, this measure from the ISM hasn’t slipped below 50, which signals contraction, but it has been trending lower. At 52.6, the reading for September was the lowest since 2016, and down from the cycle high of 60.8 in September 2018. The median estimate of economists surveyed by Bloomberg is for an October reading of 53.6, which should alleviate some concern about a slowing economy. Still, Bloomberg Economics notes that a slower pace of consumer spending growth at the end of the third quarter should weigh on the service sector, as well as a manufacturing-sector recession and “broader uncertainty that tends to delay less urgent purchasing and hiring decisions.”DON’T MISS Millennials Should Accept Their Housing Fate: A. Gary Shilling Alarms Blare on Triple-B Bonds But No One Cares: Brian Chappatta The Fed and Markets Enter Into an Uneasy Peace: John Authers The Fed Helped Trump Win the 2016 Election: Ramesh Ponnuru Bitcoin's Enemies Are Planning Their Revenge: Lionel LaurentTo contact the author of this story: Robert Burgess at firstname.lastname@example.orgTo contact the editor responsible for this story: Beth Williams at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
U.S. stocks jumped Monday after Commerce Secretary Wilbur Ross stoked hopes that a first phase trade agreement with China would get done. The comments helped investors shrug off some unfavorable news from companies including McDonald’s and Under Armour.
U.S. stocks slid Thursday following reports that Chinese officials doubted whether a trade deal would get done, and some weaker-than-expected new economic data.
(Bloomberg) -- Explore what’s moving the global economy in the new season of the Stephanomics podcast. Subscribe via Pocket Cast or iTunes.The bond market isn’t convinced that the Federal Reserve is done lowering rates even after policy makers signaled a pause unless the economic outlook changes materially.Overnight swap rates fully priced out a December rate easing in the minutes following the central bank’s decision to cut for a third straight meeting, citing the implications of global developments. But they still see another reduction by July 2020, and yields on longer maturity Treasuries fell Thursday.The reaction intensifies the focus on key U.S. data in the days ahead as investors try to divine the Fed’s path, starting with Friday’s figures on the labor market and manufacturing. Fed Chairman Jerome Powell said monetary policy “is in a good place.” But the market’s reaction reflects a darker take on the economic outlook, according to Conning’s Rich Sega.“The rally in Treasuries and move lower in yields after the press conference means the market is reading the data that the economy is slowing, and remains pessimistic,” said Sega, global chief investment strategist at Conning, which manages about $171 billion.Powell’s AssessmentBenchmark 10-year Treasury yields dropped to 1.73% Thursday, the lowest in more than a week. The yield curve flattened, and the Bloomberg Dollar Index extended declines. The move spread into Europe, with German 10-year yields falling 5 basis points to -0.41%.In his press conference Wednesday, Powell noted that the risks around trade tensions and Brexit show signs of improvement. The euro area had its temperature taken with inflation data for the region slowing to an annual 0.7% in October, short of the European Central Bank’s target of close to but below 2%.Chris Rands, a portfolio manager at Nikko Asset Management in Sydney, agrees with Powell’s assessment about the economy, arguing that bond markets have been too aggressive in pricing in more cuts. He sees Treasury yields climbing to 2% in three to six months.“They’re hitting the targets they are after, with U.S. unemployment at the lowest in 50 years,” said Rands. “That’s nirvana.”The Fed decision came after the Commerce Department reported better-than-expected economic growth in the third quarter, driven by consumer spending.Fleeting OptimismSome analysts and fund managers suspect the brightening prospects may prove fleeting. In Wells Fargo’s view, cooling growth and simmering trade friction mean that policy makers will have to cut rates again in January, despite pausing in December.“This is mostly predicated on a further slowdown in U.S. growth and a potential for the fragile trade peace between the U.S. and China to break down,” said strategist Erik Nelson. “We do not think the worst of the downside risks for the Fed have passed yet.”There were signs of that truce breaking, as Chinese officials are said to be casting doubt on the possibility of a long-term trade deal with the U.S.For Julio Callegari, a fixed-income money manager at JPMorgan Asset Management, any Treasury sell-offs are a chance to accumulate.“If we see a widening, it’s more of an opportunity to buy,” Callegari said. “The next step is still a cut for 2020.”(Updates prices and adds China trade news.)\--With assistance from Edward Bolingbroke, Alexandra Harris and John Ainger.To contact the reporters on this story: Katherine Greifeld in New York at firstname.lastname@example.org;Vivien Lou Chen in San Francisco at email@example.com;Ruth Carson in Singapore at firstname.lastname@example.orgTo contact the editors responsible for this story: Benjamin Purvis at email@example.com, Mark Tannenbaum, Tan Hwee AnnFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
“We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the state of the economy remains broadly consistent with our outlook,” Powell told reporters at his post-meeting news conference.
Since the rate cut was widely anticipated by the financial markets, and economists had predicted the central bank would hit the pause button in December, traders showed little reaction to the news.
The S&P 500 rose to a record high after President Donald Trump touted progress for a near-term partial trade agreement with China. Stronger-than-expected earnings results also helped boost risk assets.
With less than two weeks to go before the U.S. Federal Reserve interest rate decision on October 30, every economic report will take on added importance especially with the manufacturing sector weakening, the labor market showing signs of softening and inflation still coming in below expectations.
What traders could be waiting for is Trump’s response. Will he defy his promise to Chinese President Xi Jinping, or will he remain silent? It’s highly unusual for Trump to remain silent for too long especially when a foreign country threatens the U.S. with “strong countermeasures.”
One group like Fed Chair Jerome Powell believes the outlook is generally positive. Another believes the U.S. economy needs even easier policy to avoid sinking into a recession. Still a third group believes the Fed has gone far enough or even a little too far in trying to revitalize the economy.
Investors took no chances upon hearing the news. Besides driving stocks lower and erasing some of Friday’s gains, hedgers drove December Treasury Notes 0.46% higher. December Comex gold futures rose 0.73% and the Japanese Yen jumped 0.24% higher. These protection moves are likely to increase if investors continue to turn sour on the deal.
On Friday, investors will receive a snapshot on consumer sentiment in October and hear from several Federal Open Market Committee members ahead of the central bank’s next rate-setting meeting.