MORTGAGE CREDIT NEWS BY LOUIS S BARNES - July 5, 2019

For a holiday-distracted week there is a lot going on, and loopy besides.


Today the credit markets got a bad surprise: good news. The US picked up 224,000 new jobs in June, no aspect of the report weak or distorted. A lot of money had bet on a poor report: on Wednesday the 10-year T-note fell to 1.94%, a new three-year low and wrong.


Back to 2.04% today and held as low as that by market conviction that the Fed will still cut by .25% on July 31. Market wishes for a .50% cut are dead as a hammer. The Fed-sensitive 2-year-note at 1.87% today from 1.75% yesterday says another cut will come this fall, but its jump in yield has slimmed hopes for another cut this winter.


US data alone still provide no reason for a Fed cut of any size. The twin purchasing managers’ surveys for June (“ISM”) were okay: manufacturing at 51.7 down marginally from 52.1, and the service sector 55.1 -- the same as July 2017 although down from 56.9 in May. The show is overseas, but before that revisit the Fed.


Two new Fed-governor nominee balloons have floated from the White House, Christopher Waller and Judy Shelton, both advanced because assumed compliant to White House wishes for rate-cuts. Waller has academic credentials and may be confirmed, but despite recet dovishness is unlikely to be compliant. Shelton is less likely to make it, one of those unfortunates who has studied a subject but not understood. She has written extensively and mistakenly on currencies and gold, is a modest darling of the right, and like crashed-balloon Steven Moore claimed that interest rates were too low during Obama years and too high now. If confirmed she will be ignored at the Fed.


“Overseas” involves three blocks: Japan, China, and Europe. Japan’s recent data is okay, but its fundamental situation is hopeless: it will not ever have the tax revenue to fund its government and pay interest on its debt, thus a ward of its central bank so long as the BOJ can keep its kabuki makeup glued on. Nothing urgent there.


China is in some immediate trouble and hurting everyone else. Its purchasing managers’ index has fairly collapsed, especially prices probably cut to maintain post-tariff competitiveness. It shamelessly exports its trouble: imports are down about 11%, but it still fountains exports. Its top-down ordered society may be durable, but its preservation of state-owned industries for the benefit of the Party runs at a loss which can be covered only by more debt and confiscation from the other businesses and citizens, and predatory external trade. China neither will nor can change itself quickly -- much as it must.


Europe can change, if Germany is willing.


The European Union needs new presidents for the European Commission (its executive branch) and for its central bank. Note that although Germany bought the place by letting all have access to the deutschemark-euro, the others have resisted Germans in either top job. Since the adoption of the euro the EC presidents have been Prodi of Italy, Barosso of Portugal, and the last five years the obnoxious Jean-Claude Junker, a Luxembourger but in the purse of Angela Merkel. The ECB presidents have been Duisberg of Holland, Trichet of France, and Goldman-Italian Draghi.


This week under fierce German it’s-my-turn pressure the rest of Europe made its choices: at all costs keep the Germans away from the central bank. The new ECB president will be Christine Lagarde, former French finance minister, IMF managing director, Chicago anti-trust attorney, and intern to congressman Bill Cohen. She will do well, perhaps very well and especially in crisis, and have more political effect than her predecessors.


Germany’s price for ECB shut-out: Ursula von der Leyen, Germany’s defense minister will be the new EU president. She is a Merkel protegee if farther left and Merkel’s star setting quickly, a physician who lived in California in the 1990s, and whose political career is barely 15 years long.


Those still stuck on the EU as the future of humanity and who think Brexit insane, note the selection process. The leaders of all 28 nations horse-trade in private, their choices then ratified by the EU parliament. Popular vote? Don’t be silly. Does the average EU citizen see the parliament as representative, the people having granted sovereignty to it? Pick a word from any European language translating as “contemptible nonsense.” (Quatsch, bêtises, bzdura....)


European leadership matters a great deal because Europe is able to change. China and Japan are not, except as grave crisis may force them to.


The dysfunction in Europe has been plain since the 1999 euro beginning. The euro is far too strong for all in Europe except Germany, and too weak for Germany. For any currency to work it must be calibrated to the issuer’s productivity relative to other nations’. Germany is the world’s greatest trade predator, in many ways without historical equal. Half of its economy is based on exports (the US 12%) and it runs a trade surplus of 7% of GDP -- half inside Europe which as on a gold standard has no way to earn euros to pay Germany, and which the ECB loans to other EU central banks. Germany also runs a 3% of GDP budget surplus. Germany must spend and import or the whole thing will collapse.


But Germany (of course) thinks its success is its natural right. As China’s turtling hurts the German machine, Germany’s reaction will be to do what it has been doing but harder and more hurtful to its neighbors.


Christine Lagarde is just the person to get the attention of Germany as blockheaded Merkel departs. It would take little change in German policy to improve the European economy and morale.
The world’s second problem is US tariffs. The US is entangled in European-style absurdity: the Fed may be forced to cut the cost of money to offset the external and internal damage caused by unnecessary US tariffs.


It requires extensive optimism to think that Germany and Tariff Man will change, but on the other hand either one would go a long way to fixing global trouble.

The US 2-year T-note chart of this past week shows the violent revisit of Fed plans:

The 10-year T-note in the last year. The decline can continue but will require more and more bad news. As today, any shortage and it will stop:

I am a sucker for political cartoons. The first speaks for itself, the second rooted in Ivanka Trump’s unseemly forcing herself into conversations at the G-20 -- in one case, Christine Lagarde’s eye-roll captured on camera. Google “unwanted Ivanka” for tough but inventive photoshopping.