Emerging-market companies are binging on U.S. dollar debt and that could become a source of trouble in some parts of the world if growth slows, interest rates rise or the dollar resumes its ascent.
.. U.S. dollar debt stood at $3.6 trillion in emerging markets through the third quarter of 2016, an all-time high
.. a bout of investor risk aversion could expose $135 billion worth of corporate credit to repayment problems.
.. If the dollar appreciates faster than expected, some corporate borrowers, especially those who derive their revenues largely in local currencies, could find themselves in a currency mismatch and be forced to ask the central bank for help—which not all central banks are positioned to do.
.. Countries such as India and the Philippines, which have relatively low stocks of external debt and healthy foreign-exchange reserves, are in better shape, analysts say. Economies such as Malaysia and South Africa, which have small currency reserves and high levels of dollar-denominated debt, are at particular risk. Venezuela and Turkey look especially vulnerable.
.. Venezuela’s state-run oil company PdVSA was late on its coupon payments worth $404 million in November, in an apparent struggle against low oil prices and falling foreign-exchange reserves.
.. “There are potential vulnerabilities looking further ahead, particularly if the Fed were to raise rates much more aggressively than what the market has priced at the moment,”
Cheaper Mortgages Could Spur Housing Market
Drop to 3.97% for a 30-year fixed-rate mortgage could encourage home buyers
“Almost the entirety of the Trump bump [to mortgage rates] has been washed away,”
That, in turn, could spur the housing market
.. Economists said a surge of additional buyers this spring wouldn’t be entirely welcome. “It’s driving more demand into a market that doesn’t have much in the way of supply,”
.. U.S. home prices rose 5.9% in the 12 months ended in January, the fastest rate since mid-2014
.. On the other hand, continued uncertainty in Syria, North Korea and France or a failure by Republicans to deliver on promised tax overhaul and economic growth could help keep rates lower.
China’s Gamble: How a Crusade to Prop Up the Yuan Imperils Other Pressing Mandates
Beijing’s aggressive approach threatens to shortchange the tasks of safeguarding economic growth
.. the bank’s emphasis on propping up the yuan has constrained its ability to fight other economic ills such as persistent housing bubbles. “The issue of the exchange rate,” he says, “has become shackles on policy makers’ ability to take other necessary actions.”.. China’s currency-first policy is risky because the country now faces what economists call the “trilemma,” the theory that a country can’t at once have a controlled exchange rate, free capital flow and independent monetary policy.
.. it is also creating unintended stresses, including heightened risks of a full-blown cash squeeze
.. Since then, the PBOC has spent $1 trillion, a quarter of its currency reserves, to control the yuan’s fall.
.. China isn’t seeking to stop the yuan’s fall altogether, but to guide it lower in an orderly fashion. Too sharp a drop could drive up inflation by increasing import costs and cause uncontrollable capital flight—battering confidence in the Communist Party.
.. A weaker yuan also makes it harder for Chinese companies, from state banks to airlines, to service their more-than-$1 trillion foreign debt.
.. The PBOC is also refraining from using traditional monetary-policy tools such as one it usually employed when the economy needed a push: cutting the amounts banks are required to hold in reserve, so they can make more loans. China now has one of the highest reserve-requirement ratios in the world
.. “China should tighten as little as possible so that it won’t become too expensive for Chinese firms to borrow money, but it needs to tighten enough to keep money at home,”
.. “The strategy is ultimately about buying time, but it’s a bridge to nowhere unless the authorities successfully deal with the debt problem and undertake reforms that allow for healthier growth.”
.. China’s financial system faces a liquidity shortfall—the gap between how much money is needed to meet China’s 6.5% growth target and how much is available—of as much as 13.1 trillion yuan this year.
.. the Federal Reserve Bank of St. Louis called China’s $1 trillion reserve decline “unprecedented” and said China must eventually choose some combination of tighter capital controls, tighter monetary policy or a devaluation to avoid further depletion.
Economists and investors warn that because of the effect of higher interest rates on companies with massive debt, Beijing may eventually have to give up currency control and let interest rates fall.
“The greatest risk in 2017,” says Pimco’s Mr. Frieda, “is that China is forced to choose in favor of financial-system stability at the expense of exchange-rate stability.”
Yellen’s Message: My Work Here Is (Mostly) Done
The economy will keep growing just enough to put more Americans back to work, but without overheating to generate excessive inflation. American workers will see gradual pay raises that keep compensation rising faster than inflation. Interest rates will rise gradually, while staying low by historical standards. And that’s all before accounting for any major stimulative policies that may emerge from the Trump administration and Congress.
.. She suggested no urgency toward a tightening of the money supply that might suggest a hair-trigger readiness to accelerate interest rate increases. Ms. Yellen evinced little fear that the Fed is behind the curve, suggesting that two more interest rate increases are on the way over the remainder of 2017.