ECB Signals Possible Rate Cut, Bond-Buying Extension European Central Bank President Mario Draghi signaled that the bank could cut interest rates or expand its giant bond-buying program as soon as its next policy meeting in July, sending stocks higher and the euro lower against the dollar.
The comments, delivered at the ECB’s annual research conference outside Portugal’s capital, represent a clear statement of intent from Mr. Draghi, who is wrestling with the fallout from international trade tensions on Europe’s critical manufacturing sector and stubbornly low inflation.
In a sign of the headwinds Europe faces, exports from the eurozone to the rest of the world fell 2.5% in April compared to March, according to the European Union’s statistics agency Tuesday. Meanwhile, Germany’s ZEW index, a gauge of sentiment in the financial markets, fell by 19 points to minus 21.1 in June. (…)
A slew of central banks in the Asia-Pacific region, including New Zealand and Australia, have already reduced interest rates in recent weeks. The Federal Reserve could signal on Wednesday that it is preparing to cut short-term interest rates, with bond markets pricing in two rate cuts this year.
The ECB is in a trickier position because its key interest rate is minus 0.4%, almost three percentage points lower than the Fed’s.
Mr. Draghi said ECB policymakers would consider “in the coming weeks” how to adapt its policy tools “commensurate to the severity of the risk” to the economic outlook.
In particular, the ECB could tweak the parameters of its €2.6 trillion bond-purchase program, known as quantitative easing or QE, to create room for fresh purchases, Mr. Draghi said. (…)
Mr. Draghi also called for support from governments in the shape of fiscal spending, as well as more progress on a common budget tool for the eurozone “of adequate size and design” that could help guard against downturns.
FOMC FEEDSTOCK:
Via The Daily Shot:
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Empire State vs. the US industrial production:
Source: Deutsche Bank Research
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Recently, a sharp cutback in construction spending has been signaling a potential slowdown in the economy.
Source: Piper Jaffray
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And here is the Morgan Stanley Business Conditions Index.
Source: Morgan Stanley, @DriehausCapital
U.S. Home Builder Sentiment Declines
Mortgage refinancing activity surging amid lower interest rates
Data published last week by the Mortgage Bankers Association showed a sharp acceleration in mortgage refinancing applicants in the first week of June. As today’s Hot Chart shows, while the number of applicants remains at present below levels registered in recent refinancing waves (2016 and 2012-2013), the average amount being refinanced is much higher. This means that the total amount refinanced (number of applicants x average amount) is now approaching that observed in the two prior episodes. That’s good news for consumers, who will benefit from a decline in debt service costs. For the bond market, this wave of refinancing may have ended up amplifying downward pressures on yields. Indeed, a rise in the amounts of refinancing means MBS holders face greater-than-expected prepayments (lowering the weighted average duration of their portfolio). In order to offset this unwanted impact on their portfolio, money managers have to buy long duration Treasuries. (NBF)
Buying American Isn’t an Option, Some U.S. Companies Say With public hearings on the Trump administration’s China tariff plan set to begin Monday, the U.S. trade representative’s office has already been flooded with letters from companies saying they have few options besides China.
(…) Items to be hit by new tariffs include 273 categories of goods—such as consumer fireworks, fishing reels and electric blankets—for which China accounts for more than 90% of imports. Last year, $66.3 billion worth of these items were imported from China. (…)
Vietnam can handle orders for wood products and textiles but “has very weak infrastructure in metal fabrication,” officials at the Minnesota company said in a letter. In general, factories couldn’t match China’s prices or keep up with production demands.
“It was NOT even close,” they wrote. (…)
In a letter to Mr. Trump on June 13, tariff opponents, including Walmart, Target Corp. and Costco Wholesale Corp. , said current and proposed tariffs would raise costs to a family of four by an average of $2,000 a year.
China – falling into the same long-term rut as Japan?
(…) Fathom’s measure of economic activity in China, the China Momentum Indicator (CMI), slowed to 4.9% in April, down from 5.1% in the twelve months to March, hitting a new two-and-a-half-year low. As highlighted in the chart, this has resulted in a widening of the gap between Fathom’s measure of growth and the official measure, which was a steady 6.4% in the first quarter of the year.
(…) in an attempt to arrest the slowdown in underlying growth, China has resorted to its old tried-and-tested growth tactics of credit-fuelled investment. Problematically for Beijing, these efforts to cushion the economy will only exacerbate existing domestic and global imbalances.
Indeed, weaker trend growth is attributable in part to the astronomical expansion of credit observed in China in recent years, which has led to allocative mistakes at the macro level. That misallocation is evidenced by China’s non-performing loan problem, which, as Fathom detailed in a recent note to clients, is estimated to be a large and rising 28–38% of domestic GDP.
With China’s current policy mix suffering not only diminishing returns but allocative inefficiencies too, Fathom’s central scenario sees China falling into the same kind of long-term rut as Japan. In this world, despite the evergreening of bad loans and perennially low interest rates, China’s economy will slow to around 4% by 2021.
India tariff hike shows vulnerability of US trade strategy. India has struck back after the US withdrew its preferential tariff schedule
India has decided to impose long-awaited tariffs on 28 product groups after the US said it would roll back a duty-free imports scheme for approximately $6 billion worth of imports from India. The tariffs came into effect on Sunday. These retaliatory measures show the vulnerability of the high pressure strategy characterised by the current US trade policy. Not all countries will give in so easily to US demands as, for example, Mexico did. Countries that are less dependent on trade with the US will resist, with the risk of escalating tit-for-tat tariff fights. If it pushes too far in negotiations with India, Japan, the EU, and China, the US could end up being the biggest loser of all. This is because it would then face tariffs with all its trading partners involved in the disputes while the EU and the other counties would face higher tariffs only at the US border. (…)
The 28 products affected include agricultural products, with tariffs being raised by up to 120%. The measures are reportedly expected to raise about $217 million of tax revenues. Assuming that the average increase is about 50%, the tariffs will affect 1% to 2% of total Indian merchandise imports from the US. Although this is only a small fraction of US – Indian trade, it further inflames tensions between the two countries. (ING)
Saudis to Push for OPEC Cuts, Despite Tanker Attacks Saudi Arabia is set to push for OPEC to cut oil output in the second half of the year, as signs of slowing global demand for crude outweigh threats of war and worries about supply disruptions in the Middle East.
SENTIMENT WATCH
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Investors Haven’t Been This Bearish Since 2008 Financial Crisis Global growth expectations have collapsed, according to a Bank of America survey.
(…) Equity allocations saw the second-biggest drop on record, while cash holdings jumped by the most since the 2011 debt-ceiling crisis, the June poll showed. Concerns about the trade war, a recession and “monetary policy impotence” all contributed to the bearish sentiment, Bank of America said. (…)
Global growth expectations collapsed, Bank of America said, with half of the surveyed fund managers forecasting weakness over the next 12 months. The surge in cash levels set off the strategists’ contrarian buy signal for stocks, even as the poll showed relative exposure to equities over bonds narrowed to the tightest level since May 2009. (…)
The survey conducted between June 7 and 13 showed a rotation into fixed income, cash, utilities and staples and away from banking, tech and euro-area shares. (…)
Is this the capitulation that the contrarian in you is dying for? Nope! Watch the II for that as Ed Yardeni illustrates:
EARNINGS WATCH
Two weeks left to the second quarter. The number of negative pre-announcements has been stable in recent weeks and is in line with Q1’19 at the same time. However, positive pre-announcements have declined significantly.
Tech looks vulnerable as this Broadcom announcement last Friday suggests (my emphasis):
Let me [Hock E. Tan, Broadcom Inc. – CEO] address the current business environment and our outlook for the remainder of the year. We have, as I indicated, performed very much to plan in the first half of fiscal ’19. And in the second half, we had expected a recovery. However, while enterprise and mainframe software demand remained stable, particularly in North America and Europe, with respect to semiconductors, it is clear that the U.S.- China trade conflict, including the Huawei export ban, is creating economic and political uncertainty and reducing visibility for our global OEM customers. As a result, demand volatility has increased and our customers are actively reducing inventory levels to manage risks. This leads us to believe the second half of 2019 will be more in line with the first half as opposed to the previously expected recovery. We now anticipate fiscal 2019 semiconductor solutions segment revenue of $17.5 billion, which translates into a year-over-year decline in the high single digits.
Analysts have been busy reducing estimates. Last week, 89.2% of IT company revisions were down. Industrials: 80%. We’ll soon see if this is corporate positioning or real.
Last week, Factset noted that for companies that generate more than 50% of sales inside the U.S., the Q2 estimated earnings growth rate is 1.4%. For companies that generate less than 50% of sales inside the U.S., the estimated earnings decline is -9.3%.
At the sector level, the Information Technology is expected to be the largest contributor to the earnings decline for S&P 500 companies with more global exposure in Q2. Overall, this sector is predicted to report the highest earnings decline of all eleven sectors in Q2. This sector also has the highest international revenue exposure of all eleven sectors in the index.
FYI:
FYI:
Experts: Spy used AI-generated face to connect with targets
(…) The Katie Jones profile was modest in scale, with 52 connections. But those connections had enough influence that they imbued the profile with credibility to some who accepted Jones’ invites. The AP spoke to about 40 other people who connected with Jones between early March and early April of this year, many of whom said they routinely accept invitations from people they don’t recognize.
“I’m probably the worst LinkedIn user in the history of LinkedIn,” said Winfree, the former deputy director of President Donald Trump’s domestic policy council, who confirmed connection with Jones on March 28.
Winfree, whose name came up last month in relation to one of the vacancies on the Federal Reserve Board of Governors, said he rarely logs on to LinkedIn and tends to just approve all the piled-up invites when he does.
“I literally accept every friend request that I get,” he said.
Good judgement!!! Fit for a Fed governor job?
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Business Sales is not a widely mediatized stat. Yet, it strongly correlates with the growth in S&P 500 revenues. 
Don’t buy this “rebound” says 
New York Fed Factory Gauge Drops by Record to Two-Year Low
