Charts of the Week: Negative Bond Yield Spreads as Global yields fall to record, China’s Shibor rates plunge to 2009 lows as Hong Kong’s HIBOR rates spike!

Charts of the Week: Negative Bond Yield Spreads as Global yields fall to record, China’s Shibor rates plunge to 2009 lows as Hong Kong’s HIBOR rates spike!

As negative-yielding sovereigns spread with the entire Swiss curve in the negative, Germany’s 30-year yield remains the only positive.

Global bond yields hit record low prior to the payroll reports.

German bunds fell below the ECB’s deposit rates for the first time ever!

Hong Kong’s 1-week interbank lending rate (HIBOR) raced to 2008 levels to highlight symptoms of liquidity squeeze!

In the meantime, China’s overnight interbank lending rate (SHIBOR) falls to 2009 lows last Thursday, to signify panic hoarding by banks.

Finally, when the public refuses to borrow, just forced them to. Nigeria’s central bank orders banks to lend money.  

You can lead the horse to the water, but you can’t make it drink.

Unfortunately, that’s the only thing central banks know of.

Global Risk ON: PBOC Unleashed a Historic Credit Tsunami in January! ECB and BOJ Jumpstarts Balance Sheet Expansions!

Global Risk ON: PBOC Unleashed a Historic Credit Tsunami in January! ECB and BOJ Jumpstarts Balance Sheet Expansions!

Wonder why Global Stocks supposedly had the best returns since 1987 in January 2019?

Chart from Bloomberg

From Reuters: China’s total social financing (TSF), a broad measure of credit and liquidity in the economy, hit a record 4.64 trillion yuan ($685.01 billion) in January, far more than expectated, data from the central bank showed on Friday…The rise in financing levels should allay some of the anxiety about weakening credit growth as China’s economy slows. TSF includes off-balance sheet forms of financing that exist outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales. The People’s Bank of China has revised the way it calculates TSF by adding financial institutions’ asset-backed securities and loan write-offs. It has also added local government special bonds issuance into the TSF calculation from September. TSF is used as a barometer of fundraising trends and can provide some clues on activity in China’s vast and unregulated shadow banking sector.

Chart from Yardeni.com

More…

From Reuters: China’s banks made the most new loans on record in January - totaling 3.23 trillion yuan ($477 billion) - as policymakers try to jumpstart sluggish investment and prevent a sharper slowdown in the world’s second-largest economy. Chinese banks tend to front-load loans early in the year to get higher-quality customers and win market share. But they have also faced months of pressure from regulators to step up lending, particularly to cash-starved smaller firms. Net new yuan lending last month was far more than expected, and eclipsed the last high of 2.9 trillion yuan in January 2018.

The same article on corporate credit…

Demand for credit picked up sharply in the corporate sector, followed by the household sector, according to data released by the People’s Bank of China (PBOC) on Friday. Corporate loans jumped to 2.58 trillion yuan from 473.3 billion yuan in December, while household loans rose to 989.8 billion yuan from 450.4 billion yuan, according to Reuters calculations based on the PBOC data. Corporate loans accounted for 80 percent of new loans in January, up sharply from 44 percent in December.

China bank lending expanded by a gigantic USD 2.5 trillion year on year on January 2019 while Total Social Financing exploded by USD 3.1 trillion!

China’s estimated GDP in USD is at 13.457 trillion, which means 2018 bank lending growth signified an 18.6% share while TSF growth accounted for 23.06% share of the GDP.

In other words, in the face of snowballing defaults, the Chinese Government PANICKED!

It’s not just China.

From Reuters: Cheap bank loans, a form of stimulus first launched by the ECB during the global financial crisis, look set to make a comeback in coming months and investors anticipate shorter term loans with a variable rate to allow the central bank flexibility. It’s just two months since the European Central Bank wrapped up its 2.6 trillion euro (2.3 trillion pounds) bond-buying scheme, but with euro zone growth at four-year lows and other global central banks already backtracking on policy tightening, bond market expectations of ECB action are on the rise. That’s expected to take the shape of a loan package for banks — known as Long Term Refinancing Operations (LTROs) or the more targeted TLTROs. Details could come in March or June at ECB meetings that would coincide with updates of the central bank’s economic forecasts. LTROs or TLTROs — which ECB sources say are a priority over other measures — should lower funding costs for businesses and households and offset the effect of negative interest rates on banks, investors argue.

From Reuters: Bank of Japan Governor Haruhiko Kuroda said on Wednesday that it was his responsibility to achieve the central bank’s 2 percent inflation target by persistently continuing its stimulus policy. Speaking to a lower house budget committee, Kuroda also said he would closely examine the central bank’s stimulus policy so that it would not cause side effects.

From Reuters: The U.S. Federal Reserve should stop paring its balance sheet by the end of this year, Governor Lael Brainard said on Thursday, suggesting the Fed could wind up with a permanently bigger balance sheet than had been expected even a few months ago. The Fed’s “balance sheet normalization process has really done the work it was intended to do,” Brainard said in an interview on CNBC, adding that she would not want this policy tool, which is tightening financial conditions, to run counter to interest-rate policy. At its January meeting, the Fed put further rate hikes on hold.

All of a sudden central banks have been talking about easing!

Unfortunately, at 2.25 to 2.5 for the FED, ZERO rates for the ECB, and -.1 for the Bank of Japan, leveraging monetary policy through interest rate channel has been limited.

Central banks thus would have to deal with negative interest rates and balance sheet expansion through Large Scale Asset Purchases or Quantitative Easing.

Chart from Yardeni.com

And last week’s public statements weren’t just talks, the BoJ and the ECB backed the PBOC by expanding their balance sheets in January.

So to support the stock markets, central banks would have to keep expanding their balance sheets thus feeding on the global debt pile which is at USD 244 trillion as of the 1Q 2018 or 318% of the GDP (government debt at USD 66 trillion or 80% of theglobal GDP)

The BSP will be next. But it will first cut reserves.

Global central banks panic, stock markets love them.

We are at uncharted territory.

Anyway, it’s the year of the PIG.

[Beware the Year of the Pig! Unblemished Record of Economic Turmoil Since 1947! February 3]

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Interesting Headlines on China’s Xi and the ECB; the PSYEi 30 Golden Cross and….

Interesting headlines…

On China’s Xi…

Bloomberg yahoo link

South China Morning Post

On ECB’s Draghi…

From CNBC…

Now, the PhiSYx golden cross…

…and how to craft one.

Expect the unexpected in 2019

USD-PHP Hits Eleven Year High! The Government’s Ambitious Infrastructure Projects Should Aggravate on the Peso’s Predicaments

The USD-Php beat the Phisix to a new record.

Up .5%, the USD-Php soared to 50.47 a level last reached in September 2006, or an ELEVEN year high!

Among Asian contemporaries, the USD-Php was the strongest again this week (peso weakest)

The domestic currency’s weakness has been more than the USD. It has been weak against a broad spectrum of currencies.

 

Among the currency majors, with the exception of the Japanese yen, the Philippine peso has attenuated against the euro, pound and the yuan over the past year (upper charts). The yen has risen against the pesoin January but has traded rangebound since May. (But the yen-php remains up on a year-to-date basis)

Including all the components of the Bloomberg Dollar index (BBDXY), the Philippine peso has diminished against the Mexican peso, the Australian dollar, and the Swiss franc. The Canadian dollar has only recently spiked against the peso. Though the Brazilian real rose against the peso in the first two months of the year, such gains have dissipated. Or the peso has gained only against the real year-to-date. The real’s weakness has largely been due to corruption scandal that has surfaced to plague Brazil’s new administration.

The peso has condescended even against the ASEAN neighbors, namely the ringgit, baht and rupiah (lower window).

Despite the much ballyhooed G-R-O-W-T-H mantra, the broad spectrum of the peso’s weakness has been amazing.

Contrary to the public wisdom, the sustained softening of the peso entails that the demand for the peso (and peso related assets) continues to wane.

Moreover, while there has been a surfeit of domestic liquidity, there appears to be increasing scarcity in the context of USD liquidity in the domestic financial system.

And while local experts fixate on the FED’s “hawkishness” the international counterparts have raised the issue of USD flows in terms of remittances and of trade deficits. Hardly has there been any meaningful discussion on relative supply side factors.

On remittances. Unless much of the domestic population will be sent overseas, the law of diminishing returns will continue to dominate remittance dynamics predicated on the sheer scale of OFWs and overseas migrant workers.

Additionally, incomes of OFWs and immigrants depend or are leveraged on the global economy. With global debt at a staggering US $217 trillion or 325% of GDP in 2016(!), the burden of debt servicing will hardly generate enough room for investments and therefore provide the necessary fulcrum for growth dynamics. Furthermore, since much of these debts had been used to finance overcapacity, the latter will also serve as obstacles to real economic growth. Both these factors parlay into constricted demand.

Moreover, increased risks of protectionism and political aversion to migrants will likely serve as added hurdles to increased overseas deployment. Given these factors, remittance growth should be expected to grow incrementally, stagnate or even decline.

This brings us to trade deficits.  The government proposes an aggressive infrastructure spending program to the tune of Php 8 to 8.4 trillion over the tenure of the incumbent administration (2017-2022).

To put in perspective the scale of the proposed spending, 2016’s NGDP was at Php 14.5 trillion. The personal savings as of May was Php 4.09 trillion. Total resources of the financial system as of April totaled Php 17.4 trillion with banking system’s resources at Php 14.142 trillion. This means that that the proposed infrastructure spending program would equal 55% of NGDP, 195% of personal savings and 46% of the financial system’s resources. And that’s just infrastructure alone.

Since the government’s massive infrastructure spending alone will compete and eventually “crowd out” the private sector on resources and on financing, these most likely will lead to even bigger trade deficits (greater imports than exports). With insufficient dollar flows from remittances and from foreign investments (as consequence of “crowding out”), the government’s current dollar liquidity predicament will likely intensify. The government will most likely finance such liquidity shortages with more borrowing from both local and international sources of USDs, the BSP will probably increase its usage of derivatives “forward cover” and possibly resort to access of currency swaps with other central banks.

So the government will not just be borrowing to finance its ambitious spending programs, it will also expand its leverage on the USD for liquidity purposes. At the end of the day, increasing dollar indebtedness would redound to magnified “US dollar shorts”.  

And while popular politics remain fixated on free lunch funded pipe dreams, raging global asset markets may have been forcing global central banks to have second thoughts on the continued provision of easy money.

Fed officials as Ms. Janet Yellen warned last week of expensive price valuations. San Francisco Fed John Williams said the stock market "seems to be running very much on fumes" and that he was "somewhat concerned about the complacency in the market." (Bloomberg)

Ms. Yellen’s vice chair, Stanley Fisher “pointed to higher asset prices as well as increased vulnerabilities for both household and corporate borrowers in warning against complacency when gauging the safety of the global financial system.” (Bloomberg)

The Bank of England “ordered banks to hold more capital as consumer debt surges” (The Guardian) while its governor Mark Carney gave the case of raising interest rates (Marketwatch)

European Central Bank’s Mario Draghi hinted that tapering of QE may be in the offing by saying “deflationary forces had been replaced by reflationary ones”.

Mr. Draghi’s statement sparked massive selloffs in bonds, and a huge spike in the euro!

ECB officials tried to downplay Mr. Draghi’s statement to no avail.

The Swedish Central Bank is widely expected to ditch its easing bias next week.

Last weekend, prior to the spate of hints by central banks, the Bank for International Settlements, the central bank of central banks, urged major central banks to press ahead with interest rate increases (Reuters)

And with major central banks signaling a concerted tightening, it’s a wonder how the Philippine government can be able to finance their proposed grandiose project.  

Aside from domestic USD liquidity issues, if the BSP continues to maintain current historic subsidies in the face of global tightening, the peso will depreciate further. Monetary subsidies include the RECORD lowest interest rate and the RECORD monetization of National government debt which went up by 8.9% in May 2017 from April’s 4.3%.

But if the BSP raises its rates to align with actions of the other major central banks, then just what happens to the much touted aggressive infrastructure spending projects?

Oh by the way, I noted in early June that the BSP has imposed a tacit tightening through a pullback in the monetization of national government’s debt. (Oh My, Has the BSP Commenced on Tightening??? June 4, 2017).

Apparently, the slowing domestic liquidity growth (11.3% in May) has percolated to impact consumer (+23.6%) and industry loan (+17.6%) growth too (lower window).

Nevertheless, the BSP seemed to have used QE (Php 31.783 billion) anew this May to finance the National Government May’s fiscal deficit (Php 33.421 billion). The doubling of growth rate has similarly reflected on M3.

Getting hooked to debt monetization translates to a policy of devaluation.

Oh, before I close, here is a SHOCKING quote of the day from Ms. Yellen (Reuters, June 27, 2017)

U.S. Federal Reserve Chair Janet Yellen said on Tuesday that she does not believe that there will be another financial crisis for at least as long as she lives, thanks largely to reforms of the banking system since the 2007-09 crash.

"Would I say there will never, ever be another financial crisis?" Yellen said at a question-and-answer event in London.

"You know probably that would be going too far but I do think we're much safer and I hope that it will not be in our lifetimes and I don't believe it will be," she said.

Writing on the wall?