Warnings from US factories

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good morning. Yesterday, the US dollar weakened again, and (as Brookings’ Robin Brooks pointed out) this happened even when the Treasury Department rose, increasing the spread of bonds in other developed countries. This is an unusual combination, suggesting that global relocation and hedging of dollar assets continues. But perhaps you have another explanation? If so, please email us with that: unhedged@ft.com.

A slightly ominous manufacturing report

The ISM manufacturing index DIP was 48.5 from 48.7 in April to 48.5 in May, but was mild (levels under 50 indicate contraction). However, looking at the data in more detail, it detects the whims of male dogs on the commodity side of the economy.

This study shows a major drop in stock and could indicate the end of a company’s frontload order to avoid the impact of tariffs on prices. If so, it won’t take long for manufacturers and merchants to restock at higher prices and hand over the increased costs to consumers.

Meanwhile, the employment and new order indicators were marked slightly, but remained in the area of ​​contraction. Price paid the index but earned 69% enthusiastic points while pulling back 0.4% points from April. Raw materials prices are still rising rapidly. The manufacturer highlighted rising prices for steel and aluminum, even before President Donald Trump doubled tariffs on two major inputs from 25% to 50% on Friday. The decline in energy prices has helped offset the cost pressures for businesses, but this has a lot of room to do it, notes Matthew Martin of Oxford Economics.

According to Oliver Allen of Pantheon Macroeconomics, the price index “aligns with the core merchandise inflation, which is about zero to 2% to 2% to 3% in April.” This means that the Federal Reserve is unlikely to come to rescue this sector either.

Overall, numbers are soft but not terrible, and manufacturing is a much lesser part of the economy than services. However, the trend is poor, and from homes to durable product orders, the moment other soft spots are generally manifested in a solid economy. Someone bring us some good news.

(Kim)

Quantitative easing by banks

Last week we wrote about supplemental leverage ratios for the proposed reforms. However, we did not talk about inflation or the impact on money supply.

New money is primarily created by commercial banks. When they lend, they make money in the borrower’s account in the form of deposits. The bank’s balance sheet increases on both sides: new deposit liability and new loan assets. Some economists argue that bank capital rules such as SLRs make commercial banks slower in money growth. This is Steve Hanke from Johns Hopkins:

Sixty years before the major financial crisis, the banking system’s financial assets were up 7-8% per year. What has happened since the GFC? . . The growth of the banking system’s financial assets has shrunk, with an average annual growth of 4.4%. . . Banks have stopped extending many new loans (due to regulations such as Dodd-Frank and Basel III) and have not involved old loans. . . That’s why we relaxed quantitatively. . . The Fed intervened to mitigate the damage caused by regulations as money supply growth was slow.

If the SLR requirements are relaxed, the bank could simply buy more finances. However, banks could also place the released capital behind new loans, leading to more economic activity. Bank of America CEO Brian Moynihan says this is what happens on recent calls with investors.

SLRs require you to hold capital at a level against risk-free assets and financial and cash. That doesn’t make much sense. . . (Reform) helps to provide clients with fluidity during both stressful times and times. Cash and government guarantee securities and government issued securities are currently 1.2 tonnes on our balance sheet. So, consider capitalizing it under the SLR, or whatever it is. That’s a big number.

Many observers (including some conspiracy-oriented, unconfirmed readers) believe that SLR reforms are quantitative mitigation by other means. If it leads to a bank that holds more Treasury, it will push the yield down. If that leads to more loans, it provides financial stimulation. Both will be added to the money supply.

However, there is an important difference. By leveling reform of the degree of banks’ financial purchases, it will likely have a large impact on short-term financial yields, as opposed to bank benchmark 10-year Treasury yields, as banks prefer to buy securities for shorter periods and have a preference for current issuance by the Treasury, which will likely have a large impact on shorter periods of financial yields to encourage banks’ finances purchases. And 10-year yields have an important link to the real economy, as they help determine mortgage rates (among other things).

Bank financial purchases will not shake the Treasury market just like the Fed purchases, Joseph Wang says in currency macros.

When the Fed does QE, they essentially say to the market: “We buy $100 billion a month.” The Fed doesn’t care what the rate is when they do that. But if the bank does this, they will be more discretionary. There is no rule of about $100 billion a month. They would buy more opportunistically. . . This means that the impact of interest rates will be reduced.

Similarly, remember that banks’ commercial lending decisions are determined not only by the role of capital but also by the economy. They only lend if there is a trustworthy company that needs more credit. Regulators cannot create more of them by messing around with ratios.

(Lighter and Armstrong)

Two good readings

Tacos Economy Tacos Politicos.

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