Displaying items by tag: US

(New York)

While the housing market has been doing well and credit markets still look solid on a fundamental basis, there is big trouble brewing in US housing. The proportion of highly indebted mortgage borrowers is surging. Fannie Mae recently increased the amount of total debt as a proportion of income it allows for federally-backed mortgages from 45% to 50%. Rising house prices and stagnant incomes mean that 1 in 5 mortgage borrowers now have 45% or more of their pre-tax income eaten up in debt every month. That is triple the same proportion of borrowers compared to 2016 and the first half of 2017.

FINSUM: The mortgage market has been running out of prime borrowers, and in response, the proportion of subprime borrowers seems to be rising, though this is being accommodated by increased federal support for such mortgages. Are we headed down the same road again?

(Beijing)

The US and China are currently in a hot-under-the-collar spat over trade. Each side is proposing to raise tariffs in response to the other, and there is no end in sight. Well, China may be changing gears and adding a new weapon—Yuan devaluation. Beijing is reportedly exploring how to use devaluation as a tool in a trade war. Weakening the Yuan would make Chinese goods cheaper to buy overseas and could be a tool to boost exports. At the same time, it makes it harder for Chinese companies to buy overseas goods.

FINSUM: While on paper it sounds promising, intentionally weakening the currency would give weight to claims (most loudly by Trump) that China is a currency manipulator, which could turn favor against Beijing.

(Washington)

There is a lot of rhetoric out there about how the labor market is extremely tight, which will push wages up and force the Fed to raise rates. According to Barron’s, if you really compare this year’s labor market data versus last year, it looks like there is an unemployment pool of at least around 1 million Americans that could re-enter the labor force. This group is often referred to as the “hidden unemployed”.

FINSUM: This means that there is actually more capacity for the labor market absorb jobs than is often reported, meaning there may not be as much upward pressure on wages, and therefore, rates, as expected.

(Washington)

The back and forth on the burgeoning trade war with China is getting exhausting and confusing. Only a day after US officials tried to clam down the situation by saying that a trade war would be avoided, President Trump announced a further $100bn of proposed tariffs on Chinese goods. Trump explained his response to China’s hike in tariffs on US goods this way, saying “Rather than remedy its misconduct, China has chosen to harm our farmers and manufacturers … In light of China’s unfair retaliation, I have instructed the [US Trade Representative] to consider whether $100bn of additional tariffs would be appropriate . . . and, if so, to identify the products upon which to impose such tariffs”.

FINSUM: So we understand why the US wants to raise tariffs, but at the same time, it is hard to root for a trade war which seems like it will hurt all involved.

(New York)

The US credit market has not exploded, but as yields drift higher, the situation is worsening. High yield is seeing yields and prices back to where they were in 2016, though not quite as bad as in early 2016, which was the last time there was an equity market correction. There are big worries about the huge ($2.5 tn+) pool of triple B bonds, which look vulnerable. Triple Bs now account for half of the US investment grade market. The good news is that corporate earnings are in good shape, which means credit-worthiness is still strong.

FINSUM: We think fears about the credit market are a little overblown at the moment. Earnings and credit-worthiness are still strong, and there is going to be good demand for decent yields, which should keep things in a band.