Date: October 31, 2018
Treasury Lifts Long-Term Debt Sales for Fourth Straight Quarter
The U.S. Treasury Department will raise the amount of long-term debt it sells to $83 billion this quarter, again concentrating its increases of coupon-bearing debt on securities with five years or less to maturity. In its quarterly refunding announcement on Wednesday, the Treasury boosted the auctions of notes and bonds from $78 billion the previous quarter. It was the fourth consecutive quarterly increase, with the government again lifting sales of securities of all maturities as well as its floating-rate debt. Treasury slowed the pace of its outsize increases to its 2-, 3- and 5-year note auctions over the current quarter relative to the last quarter. The department also detailed plans to begin next year adding a new five-year inflation-protected security, or TIPS, to its auction calendar, and made adjustments to its 30-year TIPS cycle. It left unchanged sales of its current TIPS offerings this quarter, but signaled gradual increases are likely starting after February next year. The Treasury will sell $37 billion in three-year notes on Nov. 5, compared with $36 billion it sold last month and $34 billion in August. The government increased to $27 billion the sale of 10-year notes to be auctioned on Nov. 6, from $26 billion last quarter, while hiking the 30-year bonds to be sold on Nov. 7 to $19 billion from $18 billion in August. The sales will raise new cash of $28.7 billion, Treasury said. The department will increase its two-, three- and five-year notes by $1 billion per month over the next two months, a change from what it announced in August when Treasury increased sizes by $1 billion every month over the quarter. It will hike by $1 billion its seven-, 10- and 30-year auctions in November and hold the auction sizes steady at that level. The department will increase the auction sizes of the two-year floating rate note by $1 billion in November. The changes will result in an additional $27 billion of new issuance, which is lower than the $30 billion increase announced in August.
Italy’s Economic Horror Show Starts Now
The country’s economy stagnated in the third quarter, according to figures released on Tuesday. The slowdown may be part of a wider trend: The euro-zone economy expanded by a meager 0.2 percent in same three months. But it’s clear that the uncertainty which has accompanied the rise to power of Italy’s populist government has started to take its toll. The deceleration will throw a spanner in the plans of finance minister Giovanni Tria, who is betting big that the economy will expand by 1.5 percent next year so he can fund a raft of giveaways while keeping Italy’s enormous public debt on a slight downward path. This growth forecast had already been judged too optimistic by Italy’s own fiscal council. It now looks like an impossible mission. The government would be wise to reverse course on its most damaging measures before borrowing and indebtedness spiral out of control. Italy’s slowdown has its roots in the weakening of the euro zone economy. Protectionism is hurting exports, which had helped to drive growth for both Italy and the rest of Europe in 2017. German car production has also stalled as automakers struggle to adapt to new emissions tests. Since Italy provides so many components for this industry, this may have played a role. The hope is that as vehicle production rebounds and if the protectionist winds abate, the economic deceleration will prove temporary. However, Italian industry faces some additional and unnecessary headwinds of its own. Since the creation of the new government in the spring, Rome’s borrowing costs have shot up. This is making it costlier for banks to fund themselves on the financial markets. For customers, lending rates have only begun to creep up — but the threat of further rises will have weighed on the minds of executives. It’s hard to invest big when policy uncertainty is so great.
China Signals More Support Needed Amid Pressure on Economy
China’s leadership signaled that further stimulus measures are being planned, as disappointing economic data showed that the current piecemeal approach isn’t working. The nation’s economic situation is changing, downward pressure is increasing, and the government needs to take timely steps to counter this, according to a statement from a Politburo meeting Wednesday chaired by President Xi Jinping. The signal of increasing urgency came just hours after purchasing manager reports showed an across-the-board deterioration that risks spilling into a broader drag on global growth. The world’s second largest economy is being damaged by its trade war with the U.S. and a domestic debt cleanup. With those pressing constraints, officials have added modest policy support so far, ranging from tax cuts to regulatory relief, rather than repeating the fiscal firepower seen after a previous slowdown. Investors seem unpersuaded by the drip-feed approach with the yuan hovering around a decade low and stocks sliding. “Accepting slower growth has long been a challenge for Beijing, but now the rate of slowdown is firmly out of the comfort zone,” said Katrina Ell, an economist at Moody’s Analytics in Sydney. “In recent years the balancing act has been addressing risks in the financial system against pressure to stabilize economic growth. It appears the latter is again more of a priority.”
Hong Kong Shares Suffer Worst Monthly Run of Losses in 36 Years
Hong Kong equities rallied Wednesday, but the Halloween spurt was never going to be enough to sugarcoat a grim October. The city’s Hang Seng Index fell 10 percent this month, its biggest loss since the tumultuous January of 2016. The October decline takes the benchmark’s losing streak to six months, its longest downward run in 36 years. Even the Shanghai Composite Index, the world’s worst equity gauge this year, did better in October, falling only 7.8 percent. The moves in Tencent Holdings Ltd. have a big impact on the index because of the Internet company’s size, even after shedding more than $250 billion in value since late January. This month has been a bad one for Tencent, with a global tech sell-off — the Nasdaq 100 is down 11 percent — adding to woes including slower earnings and a clampdown by Chinese authorities on gaming. Despite mustering a 5.9 percent rally Wednesday, Tencent is still down a whopping 17 percent this month, its worst since November 2011. Sector peers AAC Technologies Holdings Inc. and Sunny Optical Technology Co. have tumbled more than 24 percent, the worst performers on the Hang Seng Index, which eked out a 1.6 percent gain Wednesday. Tech stocks haven’t alone dragged the index lower: all but three of its 50 constituents — Citic Ltd., Bank of Communications Co. and China Overseas Land & Investment Ltd. — declined this month. In addition to the tech rout, stocks continue to be buffeted by factors including the trade dispute between the U.S. and China, a sell-off in emerging markets and concern about Chinese growth.