QE May Be Over, But the Fed’s U.S. Debt Hoard Is About to Soar
If you thought the Federal Reserve was done with quantitative easing, you might only be half right. As soon as next year, analysts say the Fed will resume large-scale buying of debt securities — this time just U.S. Treasuries — in amounts that may ultimately exceed its crisis-era purchases. According to an estimate by Wells Fargo & Co., the central bank’s balance sheet will rise past its historic peak as it adds over $2 trillion to its Treasury debt holdings in the next decade. Of course, it won’t be called QE, which President Donald Trump has urged the Fed to restart. Rather than trying to drive down long-term interest rates to boost growth, the purchases are intended to replace the Fed’s mortgage-bond holdings gradually as they mature and to keep ample reserves in the banking system. But the effect, some say, will nevertheless be largely the same. “For anybody that has been in the market for the last 10 years, it will feel like QE,” said Priya Misra, global head of rates strategy at TD Securities. “Once again the Fed will be the single largest buyer of Treasuries and (this time) in a non-QE world. This will be a very bullish Treasury-market dynamic.” And what happens in the U.S. Treasury market may have lasting consequences for the broader economy. Not only do Treasury yields reflect how much the government pays to borrow money for an array of federal programs, but as the global benchmark for lending, they also determine the interest rates on everything from mortgages to auto loans and corporate debt. So the more the Fed bought and held through QE, the theory went, the cheaper it would ultimately be for consumers and businesses to take out loans. During the post-crisis era, yields on 10-year Treasuries have averaged just under 2.5% — roughly half the level in the decade prior to the financial crisis. Monetary policy is “a little more stimulative today than it would have been pre-crisis because of these balance-sheet dynamics,” said Jay Bryson, global economist at Wells Fargo. The big takeaway for the average person is that, all else being equal, rates on mortgages and other long-term loans in the broader economy are slightly lower because of the Fed’s large debt holdings. Granted, a lot of the bang from QE itself came from its “signaling effect,” which drove yields lower as investors anticipated the Fed’s purchases, says Lawrence Dyer, head of U.S. rates strategy at HSBC.
Brexit Targeted Foreign Workers. Now Robots Are Coming
It’s 5 p.m. on a wet Wednesday afternoon in the English market town of Spalding and Simon Bradshaw and his partner, Sharna, are taking their daughter to see a new statue commemorating 19th century hiring fairs for farmers and shepherds. Their visit says less about a keen interest in agrarian history and more about the Britain of today in the most ardently pro-Brexit region. They say the bronze structure is being vandalized by people from Eastern Europe. Sharna, a stay at home carer, complains immigrants made the town dangerous and overcrowded. “They’ve no respect,” she said. From Donald Trump’s America to Italy and Hungary, the vilification of immigrants is hardly new nowadays. But the flipside to the resentment in the U.K. is that for people who saw Brexit as a defensive wall against incomers, the threat isn’t human, it’s robot. Bradshaw, 38, works as a forklift driver at a local food distribution company. Manual jobs like his are commonplace in the county of Lincolnshire, many of which were filled by east European migrants in recent years. The irony for those who believed the influx of cheap labor was jeopardizing their livelihoods is that they now face having their jobs automated if Brexit yields some of the economic dividend its supporters say it will while curbing immigration. Britain currently has the lowest density of robots in manufacturing among the Group of 10 nations, partly because businesses opted to use cheap and expanding migrant labor force in the past decade rather than buy new machinery to boost their efficiency. Companies initially could use robots to fill labor shortages, but in the longer term the threat is that they end up stealing jobs too. Indeed, the slow pace of adoption is a long-standing problem for Britain’s international competitiveness and productivity. In 2017 Britain had just 85 robots per 10,000 employees, compared to 106 on average across Europe, according to the International Federation of Robotics. About half of Britain’s robots are used in car manufacturing. The food industry is only just beginning to use them for cutting, moving and packaging products. But Britain’s low robot density also makes it ripe for investment, with 1.5 million jobs at high risk of having some tasks automated, according to the Office for National Statistics. Regions most at risk of losing jobs to robots are also those that voted for Brexit, based on Bloomberg analysis of ONS data.
Here’s Where China’s Debt Iceberg Shows the Biggest Risk
In China’s financial system, the bigger the role of the state, the cheaper the funding costs. As a rule. But in one corner of the country’s $13 trillion bond market, something different has happened. The highest yields in the 7.5 trillion yuan ($1.1 trillion) worth of debt sold by local government financing vehicles are found on the securities sold in regions where the public sector dominates the economy. That analysis, conducted by Bloomberg on data as of April, showcases both the productivity gap between state-owned and private industries, and the increasing differentiation between weaker and stronger borrowers in Chinese bonds. As China’s economic growth slows, the pressure is set to grow for policy makers in Beijing to ensure against mass defaults. “Places with the most noticeable debt risks, such as the northeast area, Tianjin, Guizhou, Yunnan and Chongqing, all have a bigger state-driven economy,” said Wan Qian, China economist at Bloomberg Economics in Hong Kong. “Such a state-led model is less sustainable, and the debt may damage economic growth in the future,” she said. As it gets easier for global investors to access China’s bond market, the world’s third largest, LGFV securities are potentially appealing. They enjoy both higher yields and a record — up to now — of implicit official backing. But as authorities crack down on the borrowing local governments have built up off of their balance sheets, refinancing risks are set to climb for some of the most indebted regions.
South Korea Faces Greater Export Pain as Trade Tensions Escalate
South Korean exports are set for another drop in May, and to go from bad to worse if the U.S.-China trade war doesn’t cool down soon. Exports during the first 20 days of the month fell 11.7 percent from a year earlier, pointing to a likely sixth-straight full-month drop, driven by tumbling prices of semiconductors and falling exports to China, the country’s biggest export market. Semiconductor shipments, which account for about a fifth of South Korea’s exports, fell 33 percent, while total exports to China dropped 16 percent. The recent slide in the South Korean won, which ranks as Asia’s worst performing currency over the past three months, will do little to help given the negative macro factors, which include a downturn in demand and prices for semiconductors. The currency has dropped 5.6 percent over three months. The escalating trade war between the world’s two largest economies is having a greater impact. Finance Minister Hong Nam-ki said Monday that it could deliver an even bigger blow to the Korean economy than seen already. “The country most affected by the U.S.-China trade dispute is neither U.S. nor China, it’s Korea,” said Park Sang-hyun, economist for HI Investment & Securities in Seoul. “If the trade talks don’t come to agreement at the G-20 in late June, it’s tough to predict that Korean exports will shift to positive territory in the second half.”
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