As we kickoff trading in December, look at what is happening around the world as the Fed engages in QE4.

S&P Futures Fell
December 2 (King World News) – Peter Boockvar:  The S&P futures fell off their early morning high after the Trump tweet that called out Brazil and Argentina and “effective, immediately, I will restore the Tariffs on all Steel & Aluminum that is shipped into the US from those countries.” He is specifically criticizing the dramatic falls in their currencies and telling the Fed to “Lower Rates & Loosen.” We know why Argentina’s currency has collapsed over the past year and the Brazil Real is caught in the vortex of the protests in Chile…

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As for the Fed, we’ve gotten three rate cuts as we know and a dramatic rise in the size of their balance sheet in a very short period of time. Trump should be happy with that. The Fed can say it’s not QE4 as much as they want but it only matters how the markets interpret it and they see an expansion of the Fed’s balance sheet to the extent its grown and the only response is, it’s QE. Buy everything. Since the repo earthquake in early September, the Fed has added a net $283b worth of T-bills to its balance sheet. Monetization for sure.

QE4: Fed’s Balance Sheet Continues To Balloon

The Financial Times is running a headline today titled “US Federal Reserve considers letting inflation run above target.” If there is any validity to the point of the article, it would prove that the Fed still has their head in the academic sand. Has anyone in the Fed seen the Yellow Vest protests and understand what caused it (higher gasoline prices)? Have they seen the disarray in Chile (sparked by higher subway fares)? Have they seen what is going on in Hong Kong (it’s not just the desire for freedom from the Mainland, it’s is disgust with the most expensive housing costs in the world)? Are they listening to the loud inequality debates in the US (where higher inflation is a regressive tax that furthers this divide)? Have they walked into a WalMart and talked to people living paycheck to paycheck? Have they spoken to a subprime buyer of a car whose price is at a record high and the loan terms go out now 8 years just as the CPI’s hedonic adjustment said that auto prices are unchanged over the past 10 years? Does the Fed realize that long term interest rates will jump if the Fed is successful in generating higher inflation of note? Just asking.

We saw over the past few days signs of stabilization in the Chinese economy but who knows how much of the confidence figures are just on hope that we’ll see a trade deal, how much is stimulus induced and how much is organic. China’s state sector weighted November manufacturing PMI rose to 50.2 from 49.3 and that was above the forecast of 49.5. Services improved to 54.4 from 52.8 and better than the estimate of 53.1. The private sector focused manufacturing PMI from Caixin was little changed at 51.8 vs 51.7 in October. The estimate was 51.5. Caixin said “China’s manufacturing sector continued to recover in November, with both domestic and overseas demand rising and the employment subindex returning to expansionary territory for the 2nd time this year. However, business confidence remained subdued, as concerns about policies and market conditions persisted, and their willingness to replenish stocks remained limited.” 

…Quantifying the damage done to Hong Kong retailers in October, retail sales fell 24.3% y/o/y, a touch worse than the estimate of down 22.6% but obviously a complete disastrous figure. 

Meanwhile, In Europe…
The November Eurozone manufacturing PMI was revised slightly higher to 46.9 from its initial print of 46.6 and is up 1 pt m/o/m. It’s still the 10th month in a row below 50. Markit equates the current level of manufacturing with a “contraction in excess of 1%” on a quarterly rate. But, hopefully with a China trade deal and Brexit resolution, things might not get any worse for now. Germany, Spain and Italy’s PMI’s remain below 50 while France is outperforming and Greece was a bright spot with a print of 54.1. I remain bullish on the policies of Kyriakos Mitsotakis and Greek assets. 

The UK manufacturing PMI in November rose .6 pts to 48.9 from the initial print but down from 49.6 in October. I’m optimistic that Boris Johnson wins in a landslide and Brexit is done soon after so I view UK weakness that is domestically driven as old news. 

Bottom line to all the data being a bit better than expected, particularly in China, has global interest rates jumping higher. The French 10 yr is back to zero from -.06% on Friday while German yields are also up by 6 bps as is the US 10 yr yield. The Japanese 10 yr yield was up by 3 bps to -.045%.

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