March 25, 2022: The Big Test

It’s been some time since the Fed commenced a serious tightening cycle. Previous moves to raise rates progressed gingerly, so as not to risk upsetting the cherished stock market. One has to go back to 1994 for a Federal Reserve determined to actually tighten financial conditions. The Fed boosted rates 25 bps on February 4, 1994, 25 bps in both March and April, 50 bps in May, 50 bps in August, 75 bps in November and 50 bps in February 1995. Rates were hiked 300 bps in twelve months to 6.00%.

I have vivid memories of 1994. It was a decisive year for contemporary finance: Its First Test. Recall that the Greenspan Fed began aggressively slashing rates in response to an escalating banking crisis and recession. There was the massive S&L bailout. Banking system impairment was turning severe, with even worries for Citigroup’s solvency. Enterprising Greenspan to the rescue. Rates were slashed from 8% in October 1990, all the way down to 3% (lowest since 1963!) by September 1992.

It was the “coming of age” for the awe-inspiring “Maestro.” Alan Greenspan faced major systemic issues. The banking system was in trouble, and another S&L-type federal bailout risked thrusting already problematic deficits to unwieldy dimensions. The economy was in recession, with talk of deflation and even the risk of economic depression.

Greenspan was in desperate need of a reflationary spark, along with a mechanism to recapitalize the banking system – all without blowing out fiscal deficits that would risk a bond market conniption and run on the dollar. Enter a steep yield curve and the “government carry trade.” Masterful. Banks could now borrow in short-term funding markets at 3.0%, while lending to the Treasury (i.e. 10-year Treasuries) at 8.0%. It was about as close to free money as one can get.

If something looks too good to be true, it probably is. When I began working for Gordy Ringoen’s fund in 1990, hedge fund industry assets were estimated at about $35 billion. By 1993, assets had surged to around $200 billon. Greenspan’s covert bank recapitalization scheme was also doling out free money to the blossoming leveraged speculating community. Why limit profits to 500 bps annually (borrow at 3% and lend at 8%) in the “government carry trade”, when returns could be compounded with 200% (or much greater) leverage. Better yet, why not aggressively lever in higher-yielding mortgage securities, including esoteric “interest only” and “principal only” (IOs and POs) mortgage derivatives? Fortunes were being made (20% of fund returns to the general partner!), and the industry was growing like wildfire.

The Greenspan Fed allowed this fire to burn too hot. The S&P500 returned 30.4% in 1991, 7.6% in 1992 and another 10.1% in 1993. The financial sector was expanding aggressively. Broker/Dealer assets expanded 19% in 1991, 20% in 1992, and a blistering 24% in 1993. The extraordinarily loose financial backdrop was stoking intense demand for securities to leverage, along with derivatives structured with embedded leverage. The revolution to non-bank Credit (i.e. MBS, ABS, “repos,” GSEs, money market funds, corporate Credit, derivatives and Wall Street structured finance) was vigorously supported.

Coming into 1994, it was clear this new mechanism of a Fed-controlled yield curve, speculative leverage, and powerful growth in marketable Credit instruments was about to be tested. Ten-year yields traded at 5.77% the day before the first Fed hike, and were at 6.09% two weeks later. Yields were up to 6.52% by March 14th, 7.14% by April 18th, 7.50% by September 16th and 8.00% on November 4th. Yet the greatest pain was inflicted on mortgage securities, particularly the more esoteric mortgage derivatives.

From Bloomberg (David Weiss): “It was one of the biggest disasters in the history of Wall Street. David J. Askin’s $700 million array of mortgage-backed derivative funds crumbled in March, 1994, dragging down an illustrious roster of investors and triggering a collapse in the market for collateralized mortgage obligations (CMOs).”

Despite the dislocation and carnage, contemporary finance passed its first Test in 1994. I was surprised and also determined to understand how such an intense de-risking/deleveraging episode didn’t become more of a systemic issue. It was the beginning of my analytical focus on the GSEs. GSE assets expanded an unprecedented $150 billion in 1994, almost double the previous year’s record. Fannie Mae and Freddie Mac, in particular, had evolved from chiefly insurers of mortgage securities to become powerful quasi-central bank providers of market liquidity backstops.

GSE assets would expand another $115 billion in 1995, $92 billion in 1996 and $112 billion in 1997. By 1997, hedge fund assets were approaching $400 billion. Broker/Dealer assets surged 22% in 1995, 16% in 1996 and 21% in 1997. Non-bank Credit was hot, hot, hot fodder for leveraged speculation.

The year 1997 witnessed the devastating “Asian Tiger” Bubble collapses. When in early 1998 I discerned a similar fate awaiting Russia, I believed the second Big Test for the new financial structure was imminent. The collapse of Long-Term Capital Management (LTCM) pushed global finance to the edge. The Test, however, was ultimately passed at The Hands (in contrast to Adam Smith’s “invisible hand”) of a Fed-orchestrated LTCM bailout, rate cuts, the International Monetary Fund, and an unprecedented $305 billion 1998 expansion of GSE assets (followed up with an additional $317bn in 1999).

A critical Bubble Dynamic had been revealed: each bursting Bubble required more aggressive monetary stimulus, with reflationary effects spurring the next larger Bubble. The aggressive response to the LTCM debacle unleashed 1999’s wild speculative excess – the Internet mania, an almost doubling of Nasdaq and crazy telecom debt. Throw stimulus measures at a system with already powerful inflationary and speculative biases, and you’re playing with fire. Lesson Never Learned.

A bursting “tech” Bubble would be another Test for the new financial structure. I believed the Bubble had burst in 2000, but reversed course in early 2002 – warning of the unfolding “mortgage finance Bubble.” The GSEs expanded another $242 billion in 2000, a record $345 billion in 2001, and $242 billion in 2002. By the end of 2002, GSE Assets had expanded 300% in nine years to $2.55 TN. Not surprisingly, a strong inflationary bias had developed throughout both U.S. housing and mortgage finance, with 10.6% household mortgage growth in 2001 and 13.3% in 2002. Accommodating rapid mortgage Credit expansion became the centerpiece of the Fed’s post-tech Bubble reflationary strategy.

“On May 23rd, [2006] the Commission and the Office of Federal Housing Enterprise Oversight jointly announced settlements with Fannie Mae for accounting fraud.”

After the revelation of widespread accounting fraud and other irregularities at Fannie and Freddie, I began warning of another systemic Test. With the days of open-ended balance sheet growth having run their fateful course, the next serious de-risking/deleveraging episode would unfold without the GSE liquidity backstop. By the end of 2007, hedge fund assets were up to about $1.8 TN. Mortgage Credit had doubled in six years, with mortgage-related derivatives the epicenter of reckless leveraged speculation. In the five reflationary years ended 2007, Broker/Dealer Assets had inflated 77% to $6.167 TN. FIASCO.

The Test arrived in 2008’s fourth quarter. Even with the Bernanke Fed’s $1 TN QE, I thought the Bubble had burst. Better comprehending the nature of the Fed’s reflationary strategy, I began warning in early 2009 of the unfolding “global government finance Bubble.” Fed (and global central bank) QE and Bernanke’s inflationist rhetoric had unleashed Bubble excess at the heart of global finance – central bank Credit and government debt. Zero rates coerced savers into the risk markets, only sharpening the Fed’s focus on ensuring markets remained levitated.

Massive U.S. monetary inflation and resulting Current Account Deficits fueled Bubbles globally. China and the emerging markets, in particular, showed strong inflationary biases heading into the crisis, with post-Bubble stimulus stoking myriad booms. The Fed’s QE2 monetary inflation was pivotal in the spectacular growth in China’s international reserve holdings – from 2007’s $1.5 TN to June 2014’s almost $4.0 TN. “Globalization’s” inflationary heyday. China’s Bubble went to crazy excess, with fragility surfacing in 2018 and 2019.

The Fed responded to cracks in U.S. leveraged finance with another QE program in September 2019, unleashing more late-cycle speculative excess. Another Test was approaching. A panicked Fed responded to collapsing Bubble dynamics with unprecedented monetary inflation in March 2020. Historic manias were unleashed, along with powerful Inflationary Dynamics. The Test was passed, but at monumental costs.

Things turn wild at the end of cycles. In this instance, it became more a case of things going completely berserk. $5.0 TN of Fed monetary inflation in two years. I had posited the Fed’s balance could reach $10 TN, as it accommodated a major de-risking/deleveraging episode. Instead, assets inflated to $9.0 TN, as the Fed stoked the climax of history’s greatest period of Bubble excess.

The Big Test is coming, and there are many reasons why this Test is fraught with extraordinary risk. First of all, this will be the first Test where consumer price inflation is a serious concern. At this stage of a protracted Bubble cycle, only the Fed’s balance sheet has the capacity to operate as “buyer of last resort” in the event of serious de-risking/deleveraging. But with today’s powerful inflationary biases in consumer and producer prices, wages, and energy, food and global commodities markets, another bout of monetary inflation risks general inflation spiraling completely out of control.

The Big Test will come with a high-risk geopolitical backdrop, unlike anything experienced during previous Tests. Importantly, the confluence of global conflict, financial and economic insecurities, manias and market Bubbles, and surging inflation and commodities prices is no coincidence. They are all manifestations of decades of escalating Credit Inflation and Monetary Disorder.

March 23 – Financial Times (Brooke Masters): “Russia’s invasion of Ukraine will reshape the world economy and further drive up inflation by prompting companies to pull back from their global supply chains, BlackRock chief executive Larry Fink has warned. ‘The Russian invasion of Ukraine has put an end to the globalisation we have experienced over the last three decades,’ Fink wrote… While the immediate result had been Russia’s total isolation from capital markets, Fink predicted ‘companies and governments will also be looking more broadly at their dependencies on other nations. This may lead companies to onshore or nearshore more of their operations, resulting in a faster pull back from some countries.’”

Previous Tests all transpired during globalization’s upcycle. The post-2008 crisis reflation was bolstered by booming China and the emerging market “global locomotives.” Moreover, the huge surge in low-cost Chinese and EM manufacturing was instrumental in restraining consumer price inflation in the face of massive U.S. monetary stimulus. Seemingly no amount of U.S. monetary and fiscal stimulus could spur problematic consumer inflation, not with Trillions of cheap imports flowing freely.

And while not as discernible as “globalization”, the evolution of technology and digitized products and services surely also played a pivotal role in sopping up enormous monetary stimulus. While there will be no end to new technologies and advancements, I’ll suggest that the growth in the share of household spending allocated to “technology” may now plateau. PCs, the Internet, wireless, tablets and smart phones became must haves for most households. For many, paying inflated prices for basics and necessities (including debt service) will now take precedence.

March 21 – Wall Street Journal (Nick Timiraos): “Federal Reserve Chairman Jerome Powell said the central bank was prepared to raise interest rates in half-percentage-point steps and high enough to deliberately slow the economy if it concluded such steps were warranted to bring down inflation. ‘If we think it’s appropriate to raise [by a half point] at a meeting or meetings, we will do so,’ Mr. Powell said… Mr. Powell’s remarks struck a tougher tone than he used just days earlier in a press conference after the Fed voted to raise its benchmark rate by a quarter point, and he signaled a stronger bias toward lifting rates until the central bank sees clear evidence that inflation is falling to its 2% target.”

Might Powell’s “tougher tone” this week have something to do with the big stock market rally? The Fed was (once again) overly sensitive to speculative market “tantrum” dynamics in its snail’s pace lead-up to last week’s baby-step increase. The S&P500 has rallied about 6.8% since the start of last Wednesday’s Powell press conference. And after trading at 3.38% with the release of the FOMC statement, the five-year Treasury “breakeven” rate of market inflation expectations is up a quick 35 bps to a record 3.73%. In a market reaction that must concern central bank officials, 10-year Treasury yields are quickly up 30 bps to an almost three-year high 2.48%. The market ended the week pricing in 8.2 25 bps rate increases by the FOMC’s December 14th meeting.

Perhaps we are discerning a little nascent Big Test feedback. General financial conditions are not so easily manipulated after securities markets have turned wildly speculative. And bonds must being praying for the stock market to chill out. At least for now, it sure appears that inflation expectations and market yields will continue their upward trajectories so long as stocks rally.

It’s worth noting that the spread between three-month T-bills and two-year Treasury yields rose another 11 bps this week to a 20-year high 173 bps. Meanwhile, the 2-yr/10-yr Treasury spread narrowed four bps this week to 20 bps, about the narrowest level since the pandemic market crisis.

Basically, long-term Treasury yields (10-yr at 2.48%) signal that inflation is not a major longer-term issue, and/or the Fed’s tightening cycle likely winds down within the next year or so. Today, both stocks and longer-term bonds are understandably skeptical of a sustained aggressive tightening cycle. And it is this dynamic that for now supports the sufficiently loose financial conditions conducive to sustained inflationary pressures.

The Bloomberg Commodities Index jumped 5.3% this week, boosting y-t-d gains to 30.9%. Crude surged $9.20, or 8.8%, to $113.90, with year-to-date gains rising to 51%. Gasoline and Natural Gas futures rose 7.1% (up 56% y-t-d) and 14.6% (up 49%). Wheat’s 3.6% advance pushed y-t-d gains to 43%. Corn rose 1.7%, Cotton 7.1%, Soybeans 2.5%, Sugar 3.6%, and Rubber 3.0%. Gold gained 1.9%, and Silver rose 2.3%.

Not only are Fed officials now talking 50 bps rate increases, but the FOMC is expected to unveil a framework for shrinking its balance sheet (“quantitative tightening” or QT) at the May 4th meeting. Understandably, there are mounting market liquidity concerns. Reuters: “Analysis: U.S. Treasury Market Pain Amplifies Worry About Liquidity.” Bloomberg: “Commodity Traders Sound Alarm on Plunging Market Liquidity.” And while liquidity appears ample while equities are advancing, the wildness lies in wait. That all markets – fixed-income, equities, commodities and currencies – could simultaneously suffer liquidity issues is what makes The Big Test so daunting. Market Structure risk – particularly with regard to speculative leverage, the ETF complex, derivative market fragilities and trend-following flows – compounded following each previous Test.

Ominously, The Big Test will also unfold as China’s historic Bubble deflates. Despite a series of announcements from Beijing, there has been little abatement of Crisis Dynamics. Bad news continues to pile up for the developers. With yields for the most part reversing higher this week, the developer bond rally has been both short and unimpressive. Moreover, the week was notable for jumps in CDS prices for the four major Chinese banks. And China sovereign CDS gained eight bps this week to 63 bps, below the 71 bps high from Tuesday the 15th, but up significantly from the 40 bps to start the year. The Shanghai Composite declined 1.2% this week, boosting its y-t-d drop to 11.7%. The growth-oriented ChiNext Index sank 2.8% (down 20.6% y-t-d).

March 25 – Bloomberg (David Qu): “China’s widening coronavirus outbreak is putting increasing strain on the economy, according to high-frequency data. As of March 23, 21 provinces contained high- or medium-risk regions — accounting for 77.5% of GDP — up from 17 provinces (71% of GDP) a week earlier. Between March 17-23, China reported an average of 2,147 domestic Covid-19 cases per day, almost triple the count in the first half of the month. On the demand side, car sales remained below the pre-pandemic level for a third week in a row in the week to March 18. Home sales in 50 major cities widened their year-on-year decline in the second week of March.”

Between real estate stress, Covid lockdowns, waning economic vigor, and China’s partner’s ruthless invasion of Ukraine, Chinese households have good reason to question whether Beijing’s competence and capabilities have been blown out of proportion for too long.

The Russia/Ukraine War is in ways reminiscent of the early pandemic days: clearly history-changing with far-reaching but unknowable ramifications. Beijing will feign the middle road for as long as possible, but I’m skeptical China gets through this unscathed. The world is now hastily repositioning for the new “Iron Curtain” global backdrop. At the minimum, nations will be forced to respond to potentially highly problematic disruptions to energy and food supplies. The likelihood of panic buying and broad-based supply issues throughout the commodities complex is not low. And it’s difficult to see how already troubled global supply chain issues don’t get even worse – even if geopolitical conflicts don’t escalate.

March 20 – Financial Times (Chris Flood): “International investors are bracing themselves for a wave of defaults on Russian debt repayments, as the Kremlin tightens its grip over the country’s financial system following its invasion of Ukraine. Russia’s total debt owed to foreigners stood at $490bn at the end of September, according to the Central Bank of Russia. But just how much of that exposure — spread across bonds, loans, direct investments and trade credits — will be wiped out is the thorny question confronting international investors. Foreigners own $20bn of the $39.6bn in Russia’s outstanding ‘hard currency’ sovereign debt, issued via dollar and euro-denominated bonds. These have plunged in value as the war in Ukraine has escalated.”

While commodities markets have quickly begun to adapt to new realities, financial markets are slow to appreciate momentous longer-term ramifications. “Russia’s total debt owed to foreigners stood at $490bn…” So far, Russia appears to prefer keeping its options open (making some debt payments). But expect a furious Russian leadership to resolutely exact revenge – in any way it can.

It’s difficult to envisage a higher risk backdrop for The Big Test. Not surprisingly, the highly speculative stock market is struggling to effectively adjust to the rapidly deteriorating backdrop (i.e. tightening cycle, fragile Bubbles, geopolitical risk, China, etc.), only raising the risk of disorderly adjustment/dislocation.

Over the past decade, Bubble Dynamics enveloped the world – in a blow-off dynamic to conclude a multi-decade experiment in unfettered global Credit and central bank inflationism, along with market and economic structure. As such, there’s a distinct possibility that The Big Test will be more globally systemic – the U.S., China, Europe and EM all succumbing simultaneously to Crisis Dynamics.

I see The Big Test denoting the “official” conclusion to a multi-decade boom period. From my analytical perspective, it has always been a case of a historic “global government finance Bubble” eventually culminating in a crisis of confidence in government finance and policymaking. Most regrettably, there will be an unavoidable day of reckoning for such reckless inflation of perceived financial wealth. The Federal Reserve has certainly done about everything possible to corrode confidence in a public institution of such vital importance. Waning confidence in Beijing is at this point almost palpable. In Europe, the ECB’s stubborn dovish stance on inflation is almost laughable – and certainly pathetic. Moreover, the world today faces perhaps the greatest geopolitical crisis since WWII. Trying to be objective, it sure appears things are coming to a head.

For the Week:

The S&P500 rose 1.8% (down 4.7% y-t-d), and the Dow increased 0.3% (down 4.1%). The Utilities surged 3.5% (up 0.8%). The Banks gained 1.1% (down 0.7%), and the Broker/Dealers increased 0.4% (down 1.3%). The Transports declined 0.7% (down 0.6%). The S&P 400 Midcaps gained 0.2% (down 4.6%), while the small cap Russell 2000 fell 0.4% (down 7.5%). The Nasdaq100 rose 2.3% (down 9.6%). The Semiconductors jumped 2.7% (down 10.7%). The Biotechs declined 1.1% (down 8.9%). With bullion recovering $37, the HUI gold index rallied 3.5% (up 21.6%).

Three-month Treasury bill rates ended the week at 0.5125%. Two-year government yields jumped 33 bps to 2.27% (up 154bps y-t-d). Five-year T-note yields surged 40 bps to 2.55% (up 128bps). Ten-year Treasury yields rose 33 bps to 2.48% (up 97bps). Long bond yields gained 16 bps to 2.59% (up 68bps). Benchmark Fannie Mae MBS yields spiked 47 bps to 3.71% (up 164bps) – the high since December 2018.

Greek 10-year yields jumped 17 bps to 2.80% (up 148bps y-t-d). Ten-year Portuguese yields rose 15 bps to 1.33% (up 86bps). Italian 10-year yields surged 19 bps to 2.08% (up 91bps). Spain’s 10-year yields gained 13 bps to 1.44% (up 88bps). German bund yields surged 21 bps to 0.59% (up 76bps). French yields jumped 19 bps to 1.02% (up 82bps). The French to German 10-year bond spread narrowed about two to 47 bps. U.K. 10-year gilt yields surged 20 bps to 1.70% (up 72bps). U.K.’s FTSE equities index rose 1.1% (up 1.3% y-t-d).

Japan’s Nikkei Equities Index surged 4.9% (down 2.2% y-t-d). Japanese 10-year “JGB” yields added three bps to 0.24% (up 17bps y-t-d). France’s CAC40 fell 1.0% (down 8.4%). The German DAX equities index declined 0.7% (down 9.9%). Spain’s IBEX 35 equities index lost 1.0% (down 4.4%). Italy’s FTSE MIB index gained 1.4% (down 10.2%). EM equities were mixed. Brazil’s Bovespa index surged 3.3% (up 13.6%), while Mexico’s Bolsa index was unchanged (up 4.1%). South Korea’s Kospi index gained 0.8% (down 8.3%). India’s Sensex equities index fell 0.9% (down 1.5%). China’s Shanghai Exchange declined 1.1% (down 11.7%). Turkey’s Borsa Istanbul National 100 index added 1.5% (up 17.1%). Russia’s MICEX equities index increased 0.6% in renewed trading (down 34.4%).

Investment-grade bond funds saw inflows of $209 million, while junk bond funds posted negative flows of $2.698 billion (from Lipper).

Federal Reserve Credit last week expanded $28.7bn to a record $8.924 TN. Over the past 132 weeks, Fed Credit expanded $5.198 TN, or 139%. Fed Credit inflated $6.113 Trillion, or 217%, over the past 489 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week rose $15.5bn to $3.450 TN. “Custody holdings” were down $116bn, or 3.3%, y-o-y.

Total money market fund assets added $2.0bn to $4.561 TN. Total money funds increased $113bn y-o-y, or 2.5%.

Total Commercial Paper jumped $32.7bn to $1.050 TN. CP was down $83bn, or 7.3%, over the past year.

Freddie Mac 30-year fixed mortgage rates surged 26 bps to a more than three-year high 4.42% (up 125bps y-o-y). Fifteen-year rates jumped 24 bps to 3.63% (up 118bps). Five-year hybrid ARM rates rose 17 bps to 3.36% (up 52bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up two bps to 4.52% (up 127bps) – the high since December 2018.

Currency Watch:

For the week, the U.S. Dollar Index increased 0.6% to 98.79 (up 3.3% y-t-d). For the week on the upside, the Brazilian real increased 5.9%, the South African rand 2.9%, the Mexican peso 1.6%, the Norwegian krone 1.6%, the Australian dollar 1.4%, the Canadian dollar 1.0%, the New Zealand dollar 0.9%, and the Swiss franc 0.2%. On the downside, the Japanese yen declined 2.4%, the South Korean won 0.9%, the euro 0.6%, and the Singapore dollar 0.1%. The Chinese renminbi slipped 0.08% versus the dollar (down 0.16% y-t-d).

Commodities Watch:

March 22 – Bloomberg (Sybilla Gross): “Brent oil will likely hit $150 a barrel this year as the supply shock from the war in Europe coincides with resilient demand from people keen to travel after the virus, according to veteran commodities trader Doug King. The world has few options to pump more crude, and there’s little sign that consumption is under threat, said King, who runs the $425 million Merchant Commodity Fund…”

The Bloomberg Commodities Index surged 5.3% (up 30.9% y-t-d). Spot Gold rallied 1.9% to $1,958 (up 7.1%). Silver recovered 2.3% to $25.53 (up 9.5%). WTI crude surged $9.20 to $113.90 (up 51%). Gasoline inflated 7.1% (up 56%), and Natural Gas spiked 14.6% (up 49%). Copper declined 0.9% (up 5%). Wheat jumped 3.6% (up 43%), and Corn gained 1.7% (up 27%). Bitcoin rose $2,611, or 6.2%, this week to $44,396 (down 4%).

Russia/Ukraine Watch:

March 21 – Reuters (Lefteris Papadimas and Vassilis Triandafyllou): “Greece’s consul general in Mariupol, the last EU diplomat to evacuate the besieged Ukrainian port, said on Sunday the city was joining the ranks of places known for having been destroyed in wars of the past… ‘What I saw, I hope no one will ever see,’ [Manolis] Androulakis said as he arrived on Sunday at Athens International Airport and was reunited with his family. ‘Mariupol will become part of a list of cities that were completely destroyed by war; I don’t need to name them- they are Guernica, Coventry, Aleppo, Grozny, Leningrad,’ Androulakis said.”

March 21 – Associated Press (Cara Anna): “As Mariupol’s defenders held out Monday against Russian demands that they surrender, the number of bodies in the rubble of the bombarded and encircled Ukrainian city remained shrouded in uncertainty, the full extent of the horror not yet known. With communications crippled, movement restricted and many residents in hiding, the fate of those inside an art school flattened on Sunday and a theater that was blown apart four days earlier was unclear. More than 1,300 people were believed to be sheltering in the theater, and 400 were estimated to have been in the art school.”

March 21 – Reuters (Natalia Zinets): “President Volodymyr Zelenskiy said… Ukraine would never bow to ultimatums from Russia and cities such as Kyiv, Mariupol or Kharkiv would not accept Russian occupation. ‘We have an ultimatum with points in it. ‘Follow it and then we will end the war’,’ Zelenskiy said in an interview published by Ukrainian public broadcasting company Suspilne. ‘Ukraine cannot fulfill the ultimatum.’”

March 25 – Reuters (Natalia Zinets and Maria Starkova): “Moscow signalled on Friday it was scaling back its ambitions in Ukraine to focus on territory claimed by Russian-backed separatists in the East as Ukrainian forces went on the offensive to recapture towns outside the capital Kyiv. In an announcement that appeared to indicate more limited goals, the Russian Defence Ministry said a first phase of its operation was mostly complete and it would now focus on the eastern Donbass region, which has pro-Russia separatist enclaves.”

March 19 – BBC: “Russia’s military has fired a hypersonic ballistic missile and destroyed a big underground arms depot in western Ukraine, the defence ministry in Moscow has said. If confirmed it would be Russia’s first use in this war of the Kinzhal, or Dagger, ballistic missile launched from the air, most likely by a MiG-31 warplane.”

March 24 – Reuters (Jarrett Renshaw and Sabine Siebold): “The United States and its allies are working on supporting Ukraine with anti-ship missiles, a senior U.S. administration official said… ‘We have started consulting with allies on providing anti-ship missiles to Ukraine,’ the official said on the sidelines of the NATO summit in Brussels. ‘There may be some technical challenges with making that happen but that is something that we are consulting with allies and starting to work on.’”

March 23 – Reuters (Anna Wlodarczak-Semczuk, Joanna Plucinska, Alicja Ptak, Pawel Florkiewicz, Karol Badohal and Alan Charlish): “Poland is expelling 45 Russian diplomats suspected of working for Russian intelligence, the foreign ministry said… Russia said the accusations were baseless. Relations between Russia and Central European countries that once formed part of its sphere of influence have long been fraught but the invasion of Ukraine has significantly increased fear and suspicion about Moscow’s intentions.”

Economic War/ Iron Curtain Watch:

March 23 – Financial Times (Brooke Masters): “Russia’s invasion of Ukraine will reshape the world economy and further drive up inflation by prompting companies to pull back from their global supply chains, BlackRock chief executive Larry Fink has warned. ‘The Russian invasion of Ukraine has put an end to the globalisation we have experienced over the last three decades,’ Fink wrote… While the immediate result had been Russia’s total isolation from capital markets, Fink predicted ‘companies and governments will also be looking more broadly at their dependencies on other nations. This may lead companies to onshore or nearshore more of their operations, resulting in a faster pull back from some countries.’”

March 24 – Reuters (Jarrett Renshaw, Vera Eckert and Joseph Nasr): “It is ‘foolish’ to believe that Western sanctions against Russian businesses could have any effect on the Moscow government, Russian ex-president and deputy head of security council Dmitry Medvedev was quoted as saying… The sanctions will only consolidate the Russian society and not cause popular discontent with the authorities, Medvedev told Russia’s RIA news agency…”

March 22 – Bloomberg: “Russia plans to demand ruble payments for natural gas purchases from European nations, deepening its standoff with the west and potentially aggravating Europe’s worst energy crunch since the 1970s. Gas prices surged more 30% after President Vladimir Putin ordered the central bank to develop a mechanism to make ruble payments for natural gas within a week at a meeting with his government. Putin’s move showed a growing willingness on both sides to use Russian energy supplies as a weapon in the struggle between Moscow and the west over the war in Ukraine. The specifics of the new arrangement weren’t immediately clear, but by demanding payments in rubles, Putin is essentially forcing European companies to directly prop up his currency after it was sent into free-fall by sanctions placed on the Russian economy.”

March 25 – Reuters (Jarrett Renshaw, Vera Eckert and Joseph Nasr): “The United States will work to supply 15 billion cubic metres of liquefied natural gas (LNG) to the European Union this year to help it wean off Russian energy supplies… The EU is aiming to cut its dependency on Russian gas by two-thirds this year and end all Russian fossil fuel imports by 2027 due to Russia’s invasion of Ukraine. Russia supplies around 40% of Europe’s gas needs. Concerns over security of supply were reinforced this week after Russia ordered the switch of gas contract payments to roubles…”

March 23 – Reuters (Karin Strohecker and Marc Jones): “Russian holders of domestic corporate Eurobonds face delays in receiving payments settled through international agents, as transactions get snarled up by sanctions, Russia’s National Settlement Depository (NSD), companies and analysts said. Western sanctions and countersanctions by Moscow mean that the payment process on hard currency bonds issued by Russia or Russian companies has become much more complicated, with some payments delayed or getting stuck in transit.”

March 24 – Bloomberg (Ye Xie and Maria Elena Vizcaino): “China has seen investors pull money out of the country on an ‘unprecedented’ scale since Russia invaded Ukraine in late February, marking a ‘very unusual’ shift in global capital flows in emerging markets, according to the Institute of International Finance. High-frequency data detected large portfolio outflows from Chinese stocks and bonds… ‘Outflows from China on the scale and intensity we are seeing are unprecedented, especially since we are not seeing similar outflows from the rest of emerging markets,’ IIF chief economist Robin Brooks and his colleagues wrote. ‘The timing of outflows –- which built after Russia’s invasion of Ukraine — suggests foreign investors may be looking at China in a new light, though it is premature to draw any definitive conclusions in this regard.’”

March 23 – Bloomberg (Harry Wilson, Matthew Boyle, and Srinivasan Sivabalan): “For decades, global finance firms eagerly catered to Russian firms, billionaires and the government. Then tanks started rolling into Ukraine. Citigroup Inc., which has thousands of staff and billions of dollars of assets in Russia, has said it will cut back much of its business in the country. Goldman Sachs…, JPMorgan… and Deutsche Bank AG are also heading for the exit… They’re being followed by lawyers and other professionals. It’s perhaps the harshest and fastest exclusion in living memory of a major industrialized economy. The past few weeks have been a frantic dash to understand and implement sanctions that are being continually updated by jurisdictions including the U.S., U.K. and the European Union… A dozen lenders including Raiffeisen Bank International AG, Citigroup and Deutsche Bank have about $100 billion of combined exposure to Russia…”

March 23 – Bloomberg: “China’s oil refiners are discreetly purchasing cheap Russian crude as the nation’s supply continues to seep into the market. Unlike India’s state-run oil refiners, which have issued a number of tenders seeking to buy Russia’s flagship Urals crude among other grades, traders say China’s state processors are negotiating privately under the radar with sellers.”

March 23 – Bloomberg: “Russian steelmaker Severstal appears to have missed a Wednesday deadline to make good on a $12.6 million interest payment to bondholders. The money was originally due to creditors by March 16, but paying and transfer agent Citigroup Inc. wouldn’t remit the cash without the company receiving express permission from the U.S. Treasury. With a five-day grace period now expired, there’s been no sign that the payment has been passed on.”

March 21 – Bloomberg (Sydney Maki): “S&P Global Ratings is withdrawing its credit grades on Russian entities after the European Union’s decision last week to ban firms from providing ratings to companies established in the country. The withdrawal will take place before the April 15 deadline imposed by the EU, analysts Michelle James and Arnaud Humblot wrote… It comes after the rating company suspended commercial operations in the country following Russia’s invasion of Ukraine.”

March 23 – Bloomberg (Siddharth Philip and Eliza Ronalds-Hannon): “Russia’s move to transfer almost 800 foreign-owned jets to its own aircraft register amid foreign sanctions has triggered a wave of insurance claims from leasing firms whose fleets have effectively been commandeered. Lessors will assert that registering the planes in Russia when they’re already on the books in other territories amounts to a qualifying event for claims, including under their war-risk policies…”

U.S./Russia Watch:

March 25 – Bloomberg: “Russian Foreign Minister Sergei Lavrov accused the West of waging ‘hybrid war, a total war’ through sanctions against his country. European leaders want to ‘destroy, strangle the Russian economy and Russia as a whole,’ Lavrov told a meeting… Russia has no intention of being isolated and has ‘many friends, allies, partners in the world’ that it will continue to work with, Lavrov said.”

March 22 – ABC News (Luke Barr): “FBI Director Christopher Wray said… the FBI is ‘concerned’ with the possibility of Russian cyberattacks against critical U.S. infrastructure in the wake of Russia’s war with Ukraine. ‘The reason we’re concerned about it is not just based on our longstanding understanding of how the Russians operate, but it’s actually the product of specific investigative work and surveillance work that we’ve been doing all together… Most cyberattacks don’t just happen in an instant. There’s activity that leads up to it. There’s scanning and researching, researching a victim, scanning for vulnerabilities and systems. There’s developing access to those systems. So, there’s a whole range of preparatory work, which is what we’ve been seeing,’ he said.”

China/Russia/U.S. Watch:

March 19 – Reuters: “China stands on the right side of history over the Ukraine crisis as time will tell, and its position is in line with the wishes of most countries, Chinese Foreign Minister Wang Yi said. ‘China will never accept any external coercion or pressure, and opposes any unfounded accusations and suspicions against China,’ Wang told reporters…”

March 20 – The Hill (Joseph Choi): “China’s ambassador to the U.S. on Sunday avoided saying Beijing would not sell military supplies and weapons to Russia, insisting that it would maintain ‘normal’ trade relations with one of its closest allies. Host Margaret Brennan pressed Qin Gang during an appearance on CBS’s ‘Face the Nation’ on whether China would join in the West’s economic campaign to end Russia’s attack on Ukraine. She specifically asked if China would stop sending military and financial support to Russia. Qin called suggestions that China was providing military assistance to Russia ‘disinformation.’”

March 24 – Bloomberg: “Chinese President Xi Jinping has held a flurry of talks with state leaders, including Vladimir Putin, since Russia’s invasion in Ukraine. But there’s one big omission from his diplomatic outreach: Volodymyr Zelenskiy. Xi has spoken with at least eight world leaders in the month since the invasion, stressing Beijing’s preference for dialogue over war and sanctions. The leader of the world’s second-largest economy has encouraged Russia to move toward negotiations, offered to work with France and Germany to promote talks and told President Joe Biden that China ‘stands for peace.’ When asked Wednesday why Xi hadn’t spoken with Zelenskiy, Foreign Ministry spokesman Wang Wenbin told a regular news briefing that China had ‘smooth communications’ on the Ukraine issue. ‘China supports all parties to uphold the concept of indivisibility of security,’ Wang said.”

March 24 – Bloomberg: “Xi Jinping and Vladimir Putin declared a ‘no limits’ friendship between China and Russia before the Olympics began. Two months and a war later, Beijing’s envoy to the U.S. has added an important caveat. ‘China and Russia’s cooperation has no forbidden areas, but it has a bottom line,’ Ambassador Qin Gang told state-backed broadcaster Phoenix TV… ‘That line is the tenets and principles of the United Nations Charter, the recognized basic norms of international law and international relations.’ ‘This is the guideline we follow in bilateral relations between China and any other country,’ Qin added, responding to a question about Beijing’s commitment to Moscow…”

March 19 – Reuters (Ryan Woo): “A senior Chinese government official said… sanctions imposed by Western nations on Russia over Ukraine are increasingly ‘outrageous’. Vice Foreign Minister Le Yucheng also acknowledged Moscow’s point of view on NATO, saying the alliance should not further expand eastwards, forcing a nuclear power like Russia ‘into a corner’. China has yet to condemn Russia’s action in Ukraine or call it an invasion, though it has expressed deep concern about the war. Beijing has also opposed economic sanctions on Russia over Ukraine…”

March 18 – Politico (Phelim Kine): “President Joe Biden’s two-hour video call with China’s President Xi Jinping on Friday exposed a deepening divide between the leaders’ positions on both the Russian invasion of Ukraine and China’s claims to Taiwan. Biden’s outreach failed to prod Xi to commit to leveraging Chinese influence to end Russia’s aggression in Ukraine or to even use the term ‘invasion.’ The call instead provoked Xi’s implicit criticism of the alleged U.S. role in fomenting the crisis, perceived U.S. meddling in Taiwan and bitterness toward threatened U.S. sanctions against China if it aids Russia’s war effort.”

March 23 – Washington Post (John Hudson): “Repeated attempts by the United States’ top defense and military leaders to speak with their Russian counterparts have been rejected by Moscow for the last month, leaving the world’s two largest nuclear powers in the dark about explanations for military movements and raising fears of a major miscalculation or battlefield accident.”

March 22 – Bloomberg: “China’s top Russia envoy urged Chinese business people in Moscow to seize economic opportunities created by the crisis, a strategy that could help soften the blow from international sanctions. Ambassador Zhang Hanhui… told about a dozen business heads to waste no time and ‘fill the void’ in the local market, the Russia Confucius Culture Promotion Association said… While the summary made no mention of sanctions or sanctions compliance, Zhang described the situation as an opportunity.”

Europe/Russia/China Watch:

March 21 – Wall Street Journal (Laurence Norman and Georgi Kantchev): “Support for a European Union-wide ban on the purchase of Russian oil is growing inside the bloc, according to diplomats involved…, representing a significant shift in the continent’s stance toward how to ratchet up economic pressure on Moscow. Agreement on any EU ban of Russian crude is far from locked in yet, and a rapid decision to move ahead isn’t likely, diplomats said. Brussels has been willing to unleash severe economic sanctions against Russia for its invasion of Ukraine, despite the risk that those measures could have repercussions for European countries whose economies are more intertwined with Russia.”

March 22 – Financial Times (Derek Brower, Myles McCormick, Justin Jacobs and Nastassia Astrasheuskaya): “Russia is throttling capacity on a major pipeline that sends crude oil to global markets, driving prices higher and raising fears that Moscow was prepared to retaliate against western sanctions by curbing its own energy supplies. Up to 1mn barrels a day of oil shipped through the Caspian Pipeline Consortium’s pipeline from central Asia to the Black Sea could be cut for up to two months while repairs are made to storm-damaged loading facilities, Russia’s deputy energy minister said… The supply interruption comes on the eve of US president Joe Biden’s trip to Europe, where EU countries are expected to discuss imposing sanctions on Russia’s oil sector…”

March 24 – Reuters (Jarrett Renshaw, Vera Eckert and Joseph Nasr): “Russia accused Poland… of trying to destroy bilateral relations by expelling 45 of its diplomats, and said it would respond harshly. The Russian ambassador said Poland, which said… it was expelling the diplomats on suspicion of working for Russian intelligence, had also blocked the embassy’s bank accounts. The Russian foreign ministry said the expulsions were ‘a conscious step towards the final destruction of bilateral relations, the dismantling of which our Polish ‘partners’ have been systematically carrying out for a long time’.”

March 24 – Bloomberg (Chiara Albanese): “European Union officials suspect that China may be ready to supply semiconductors and other tech hardware to Russia as part of an effort to soften the impact of sanctions imposed over the invasion of Ukraine. The EU is concerned that China is ready to help President Vladimir Putin’s government weather the economic penalties it has put in place along with the U.S., the U.K. and Japan with particular focus on the availability of high-tech components, according to two people with knowledge…”

Market Instability Watch:

March 23 – Bloomberg (Greg Ritchie and Finbarr Flynn): “Global bond markets have suffered unprecedented losses since peaking last year, as central banks including the Federal Reserve look to tighten policy to combat surging inflation. The Bloomberg Global Aggregate Index, a benchmark for government and corporate debt total returns, has fallen 11% from a high in January 2021. That’s the biggest decline from a peak in data stretching back to 1990, surpassing a 10.8% drawdown during the financial crisis in 2008. It equates to a drop in the index market value of about $2.6 trillion, worse than about $2 trillion in 2008.”

March 24 – Reuters (Davide Barbuscia and Ira Iosebashvili): “A sharp sell-off in U.S. Treasuries has increased concerns about low levels of liquidity in the $23.5 trillion market, potentially amplifying losses for investors which already had a dire start to the year… While liquidity in the U.S. Treasury market has been an ongoing issue, traders and investors said there had been particular concerns during this sell-off. ‘People who buy longer-dated Treasuries, such as pensions, central banks and insurance companies, tend to stay away when you have this type of volatility,’ said Ed Al-Hussainy, senior rates and currency analyst at Columbia Threadneedle, adding that liquidity ‘is not good’ and that trading big blocks of Treasuries ‘has become very difficult.’”

March 24 – Bloomberg (Liz Capo McCormick and Michael MacKenzie): “A fresh wave of volatility threatens the battered U.S. Treasury market — and this time it’s all thanks to the Federal Reserve’s ambitious bid to shrink its $9 trillion balance sheet just as it raises interest rates. In less than two weeks, the U.S. central bank is expected to lay out a template for the process known as quantitative tightening, with Fed Chair Jerome Powell signaling the final plan may be unveiled on May 4. Powell has telegraphed a faster pace of QT is coming than the 2017-2019 episode — the market’s only previous experience with a Fed on a mission to pare asset holdings.”

March 23 – Bloomberg (Michael MacKenzie): “The Treasury 10-year yield is on the verge of breaching a downward trend line that characterized the bond bull market for decades. Since the 1980s, the benchmark yield has pushed up against the long-term trajectory in 1990, 1994, 2000, 2007 and in late 2018, only to reverse course and head lower. The test is resuming after the recent selloff pushed 10-year yields above 2.40% on Wednesday, from 1.51% at the end of last year. The ‘market selloff is testing long-term lines that have defined a bull market for decades,’ Paul Ciana, a technical strategist at Bank of America Corp., wrote…”

March 21 – Financial Times (Kate Duguid and Eric Platt): “Raising cash on Wall Street is becoming increasingly difficult as market gyrations close the door on big initial public offerings and the Federal Reserve’s turn to a more restrictive monetary policy forces companies to pay up to borrow through debt markets. The dramatic tightening of financial conditions over the past three months has accompanied violent swings in stock, bond and Treasury securities. The price moves have inflicted losses on fund managers and sapped some of the speculative energy from US financial markets. Borrowing costs for companies and individuals have been rising since late December…”

March 24 – Bloomberg (Archie Hunter and William Mathis): “Whipsawing commodity prices and eye-watering margin calls are forcing traders to reduce their activity, driving liquidity out of markets and exacerbating price swings, according to some of the world’s biggest trading houses. ‘We’re seeing clearly that liquidity in terms of being able to find buyers and sellers in distressed or highly volatile markets is becoming less,’ Engelhart Commodities Trading Partners Chairman and Chief Executive Officer Huw Jenkins said…”

March 22 – Bloomberg (John McCorry and Jonathan Ferro): “Given Mohamed El-Erian’s prescience on inflation, investors may want to hear what he says about the stock market. ‘If I’m investing over the next 12-month horizon, I would reduce equities at this point. I would take some money off the table,’ the bond market veteran told Bloomberg… ‘The market is giving you a wonderful opportunity to come out.” ‘I don’t think the market has factored in yet what’s going to happen to the economy,’ he said… ‘The Fed is increasingly being forced to consider what is the least bad policy mistake it wishes to be remembered for: meeting its inflation target by causing a recession, or allowing high and potentially destabilizing inflation to persist well into 2023…’”

Derivatives Watch:

March 22 – Bloomberg (Sam Potter): “Add another leveraged nickel trade to the long list of wipeouts in the historic turmoil rocking the metal. Just two weeks after its bearish sibling was shuttered, the WisdomTree Nickel 3x Daily Leveraged exchange-traded commodity (ticker 3NIL) is being compulsorily redeemed, issuer WisdomTree Investments said… The London and Milan-listed product, which used swaps to treble the return of nickel futures, had at one point surged more than 600% this month before the London Metal Exchange controversially halted trading in the metal. When the market eventually reopened March 16, nickel fell by the most allowed for four days in a row — delivering a fatal blow to 3NIL.”

Inflation Watch:

March 19 – Bloomberg (Elizabeth Elkin, Pratik Parija and Tarso Veloso Ribeiro): “The price of everything that goes into producing crops is surging, threatening to further fan global food inflation. Food production costs were already high. The pandemic snarled supply chains, making it more difficult — and expensive — to get parts and supplies that are vital for growing crops. Then Russia’s invasion of Ukraine took things to another level, sending markets soaring for fertilizers and for the fuels needed to run farm machinery. Inflation is so rampant that even with rising food prices, farmers are facing increasingly tough margins.”

March 21 – Wall Street Journal (Collin Eaton): “American frackers are raising the number of drilling rigs in oil fields by more than 20%, but don’t expect a similarly sized increase in production. Though the number of active U.S. oil-directed rigs has grown by roughly one-fifth in the past six months, much of the new activity is to make up for a depleted inventory of wells drilled before the pandemic, executives said. Frackers brought the best of those online last year instead of drilling new ones and will have to drill more than usual this year to offset those lost wells. Following calls by the Biden administration and others to raise production and help quell rising oil prices following Russia’s invasion of Ukraine, shale executives have pointed to a number of bottlenecks that limit their ability to increase production quickly this year, including supply-chain issues, wary investors and limits to their remaining drilling inventory.”

March 22 – Reuters (Tom Polansek and Ana Mano): “Sky-high fertilizer prices have farmers worldwide scaling back its use and reducing the amount of land they’re planting, fallout from the Ukraine-Russia conflict that has some agricultural industry veterans warning of food shortages. Western sanctions on Russia, a major exporter of potash, ammonia, urea and other soil nutrients, have disrupted shipments of those key inputs around the globe. Fertilizer is key to keeping corn, soy, rice and wheat yields high. Growers are scrambling to adjust.”

March 22 – Bloomberg: “More extreme weather caused by rising global temperatures — compounded by geopolitical turmoil and the pandemic — is hindering China’s effort to ensure food supplies for its 1.4 billion population. President Xi Jinping has made food security a priority for the world’s second-biggest economy, an effort to meet the soaring demand that’s pushed imports of corn, soybeans and wheat to record levels, making Beijing increasingly vulnerable to trade tensions and supply shocks.”

Biden Administration Watch:

March 21 – Bloomberg (Katrina Manson, Justin Sink and Jennifer A. Dlouhy): “President Joe Biden warned… about new indications of possible Russian cyberattacks, pumping up the volume on weeks of growing concern about a possible Kremlin-ordered response to crushing sanctions over the invasion of Ukraine. Biden reiterated those warnings, prompted by what he called ‘evolving intelligence that the Russian government is exploring options for potential cyberattacks.’ He urged the the U.S. private sector: ‘Harden your cyber defense immediately.’”

March 23 – Reuters (Jarrett Renshaw and Trevor Hunnicutt): “The Biden administration, seeking to deter China from aiding sanctions-hit Russia, on Wednesday warned Beijing not to take advantage of business opportunities created by sanctions, help Moscow evade export controls or process its banned financial transactions. White House national security adviser Jake Sullivan told reporters that G7 countries would soon announce a unified response to make sure Russia cannot evade Western sanctions imposed over its invasion of Ukraine with the help of China or any other country.”

March 22 – Reuters (Yew Lun Tian): “The United States should immediately revoke visa curbs on Chinese officials or face reciprocal countermeasures, the Chinese foreign ministry said… The United States is restricting visas of Chinese officials for involvement in ‘repressive acts’ against ethnic and religious minority groups, Secretary of State Antony Blinken said on Monday.”

March 24 – Reuters (David Lawder, Andrea Shalal, Xu Jing and Ellen Zhang): “The U.S. Trade Representative’s office said… it has reinstated 352 expired product exclusions from U.S. ‘Section 301’ tariffs on Chinese imports, well short of the 549 exclusions that it was previously considering. The reinstated product exclusions will be effective retroactively from Oct. 12, 2021, and extend through Dec. 31, 2022, USTR said. They cover a wide range of the initially estimated $370 billion worth of Chinese imports that former president Donald Trump hit with punitive tariffs of 7.5% to 25%.”

Federal Reserve Watch:

March 21 – Bloomberg (Craig Torres): “Federal Reserve Chair Jerome Powell said the central bank is prepared to raise interest rates by a half percentage-point at its next meeting if needed, deploying a more aggressive tone toward curbing inflation than he used just a few days earlier. ‘If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 bps at a meeting or meetings, we will do so,’ Powell said in a speech titled ‘Restoring Price Stability’… Following his formal remarks, Powell was asked by the moderator if there was anything stopping policy makers from hiking by a half point in May, which would be the first increase of that magnitude since 2000. ‘What would prevent us? Nothing: Executive summary,’ he said, drawing laughs from the audience. He added that such a decision had not been made, but acknowledged it was possible if warranted by incoming data.”

March 22 – Bloomberg (Steve Matthews): “Federal Reserve Bank of St. Louis President James Bullard said U.S. monetary policy needs to be tightened quickly to stop putting upward pressure on inflation that is already too high, reiterating his call for interest rates to rise above 3% this year. ‘The Fed needs to move aggressively to keep inflation under control,’ Bullard said… ‘We need to get to neutral at least so we’re not putting upward pressure on inflation during this period when we have much higher inflation than we’re used to in the U.S.’”

March 23 – Bloomberg (Olivia Rockeman): “Federal Reserve Bank of Cleveland President Loretta Mester says she supports front-loading interest-rate increases this year, likely including some half percentage-point hikes, to curb the hottest inflation in four decades. ‘I think we’re going to need to do some 50 bps moves,’ Mester said…”

March 21 – Bloomberg (Enda Curran): “Goldman Sachs Group Inc.’s economists now expect the Federal Reserve to raise interest rates by 50 bps at both its May and June policy meetings. Economists led by Jan Hatzius said the Fed will likely raise by 25 bps in the four remaining meetings in the second half of the year, with three quarterly hikes in the first nine months of 2023. The change of forecast by Goldman follows a speech and comments Monday by Fed Chair Jerome Powell…”

U.S. Bubble Watch:

March 24 – Yahoo Finance (Emily McCormick): “At 187,000, new jobless claims improved for a back-to-back week and reached the lowest level since September 1969. Continuing claims also fell further to reach 1.35 million — the least since January 1970. The labor market has remained a point of strength in the U.S. economy, with job openings still elevated but coming down from record levels as more workers rejoin the labor force from the sidelines.”

March 25 – Bloomberg (Prashant Gopal): “The U.S. housing boom is creating a new class of real estate tycoons with an easy source of financing: their own homes. Soaring prices have showered property owners with record equity windfalls, sending cash-out refinancings to levels not seen since the peak of mid-2000s housing frenzy. For some people, that means cash for a remodel or vacation. But others are putting that money to work by buying second, third or even 10th houses… Across the U.S., newbie investors are seeking to harness the power of home-price inflation to grow fast and get rich by becoming landlords. They’re contributing to soaring values, especially for starter homes that are in short supply. But even that can work in these buyers’ favor — as long as they’re willing to pay up — because Americans getting priced out of homeownership are in turn fueling demand for rentals.”

March 23 – Bloomberg (Jordan Yadoo): “Sales of new U.S. homes fell in February for a second month… Purchases of new single-family homes decreased 2% to a 772,000 annualized pace following a downwardly revised 788,000 in January… The median estimate in a Bloomberg survey of economists called for a 810,000 rate… The new-home sales report… showed the median sales price of a new home jumped 10.7% in February from a year earlier, to $400,600… There were 407,000 new homes for sale as of the end of February, the most since August 2008, though roughly 91% were either under construction or not yet started. At the current sales pace, it would take 6.3 months to exhaust the supply of new homes…”

March 20 – Financial Times (Nicholas Megaw and Joshua Franklin): “The biggest US investment banks have taken a $4.6bn revenue hit from the freeze in equity raisings because of recent market volatility, a sharp slowdown for Wall Street which raked in record profits from stock sales last year. Morgan Stanley, JPMorgan Chase, Bank of America, Goldman Sachs and Citigroup have generated a cumulative $645mn from equity capital market (ECM) fees so far this year, according to… Dealogic, compared with $5.3bn in the same period in 2021. Industry-wide ECM fees are down more than 75% year on year at $2.7bn. The feast-to-famine swing underscores the unpredictable nature of investment banking…”

March 23 – Reuters (Noor Zainab Hussain and Elizabeth Dilts Marshall): “The average bonus on Wall Street jumped 20% last year to the highest level since 2006, the New York State comptroller reported… The average payout for securities workers in New York in 2021 was $257,500, a figure boosted bythe record levels of deal-making and trading activity big banks handled as the global stock markets surged to all-time highs. ‘The numbers pop out … and are higher than what had been projected,’ New York State Comptroller Thomas DiNapoli said…”

March 23 – Reuters (Lindsay Dunsmuir): “An increase in delinquencies last year among a smaller pool of U.S. student loans not covered by a forbearance program put in place during the COVID-19 pandemic signals likely problems ahead for almost 37 million loans when that program ends, a New York Federal Reserve analysis showed… Borrowers covered under the forbearance program have not been required to make payments on their loans since March 2020, but the suspension of repayments is set to expire at the end of April.”

March 20 – Financial Times (Peggy Hollinger and Richard Waters): “Chipmakers’ multibillion-dollar expansion plans will be constrained by a shortage of critical equipment over the next two years as the supply chain struggles to step up production, according to one of the industry’s most important suppliers. The warning comes from Peter Wennink, chief executive of ASML, which dominates the global market for the lithography machines used to make advanced semiconductors. ‘Next year and the year after there will be shortages,’ Wennink said. ‘We’re going to ship more machines this year than last year and . . . more machines next year than this year. But it will not be enough if we look at the demand curve. We really need to step up our capacity significantly more than 50%. That will take time.’”

Fixed-Income Bubble Watch:

March 21 – Bloomberg (Emily Barrett): “Hopes for a soft landing for the U.S. economy are fading in the bond market. The Treasury yield curve is hurtling toward an inversion and traders have added to bets on interest rate cuts as soon as next year. They’re growing more concerned that a rapid-fire series of hikes from the Federal Reserve could cause a recession, following Chair Jerome Powell’s willingness to act more aggressively to get ahead of resurgent inflation. ‘The soft landing probability is declining by the day,’ said TD Securities’ head of global rates strategy, Priya Misra… ‘It is possible but really needs inflation to subside soon.’”

March 23 – Bloomberg (Amanda Albright): “The $4 trillion state and local-debt market just logged its most volatile 10-day period since the early 2020 selloff… Benchmark yields rose as much as 11 bps on Tuesday, driving the market to its worst day of performance since April 2020.”

Economic Dislocation Watch:

March 23 – Bloomberg (Ann Koh and Kevin Varley): “Congestion in the key Chinese ports of Shenzhen and Hong Kong due to Covid-19 lockdowns has risen to the highest level in five months, posing possible delays to goods heading to the U.S. this summer.”

March 22 – Bloomberg (Ann Koh and Kyunghee Park): “More than a million containers set to ride 6,000-plus miles of railway linking Western Europe to Eastern China via Russia are now having to find new routes by sea, adding to costs and threatening to worsen the global supply chain chaos. With Moscow’s war raging in Ukraine, exporters and logistics firms transporting auto parts, cars, laptops and smartphones are now looking to avoid land routes passing through Russia or the combat zone. Security risks and payment hurdles stemming from sanctions are mounting, as is wariness that customers in Europe could boycott products that used Russian rail.”

March 24 – Bloomberg: “China’s Guangdong province, the industrial hub with a GDP bigger than South Korea, is facing another round of power shortages after being forced to curtail electricity twice last year. Guangdong faces a tight supply situation throughout the year and a large shortfall in the second quarter, Zhang Mianrong, chairman of the Guangzhou Power Exchange Center, said… Guangdong was hit by power shortages last summer when low reservoirs sapped hydropower while a heat-wave boosted air-conditioning demand. It had to curtail electricity to some factories again in the fall when the entire country faced a shortage of coal.”

March 24 – Wall Street Journal (Jon Emont): “In his nine years selling fertilizer to corn and rice farmers in West Africa, Malick Niang says he has never seen such a severe supply crunch—or such high prices. Since Russia invaded Ukraine, shipping companies have avoided docking at St. Petersburg, Russia, to collect goods, Mr. Niang said. That, together with the impact of the West’s financial sanctions against Moscow, means fertilizer exports from Russia—the world’s largest producer—have fallen sharply. Mr. Niang contacted sellers elsewhere, such as in Senegal and Morocco, but was told their order books are full until the end of the year. ‘Maybe we will find one or two options different from Russia, but it’s going to be very expensive,’ he said.”

China Watch:

March 21 – Bloomberg: “China’s government said it will step up policy support for the economy and capital market, reiterating earlier vows to shore up battered investor confidence in the face of weaker growth, a slump in property and regulatory crackdowns on technology businesses. In a meeting of the State Council chaired by Premier Li Keqiang, the cabinet called for the adoption of monetary policy tools to sustain credit expansion at a stable pace… ‘We should properly handle the problems in the operation of the capital market in accordance with the principle of market and international rules, and create a stable, transparent and predictable development environment for all kinds of market participants,’…”

March 22 – Bloomberg: “Bribery. Kickbacks. Cover-ups. For one week in January, Chinese state television devoted its prime-time slot to a series that detailed high-profile financial crimes by some of country’s most senior bankers. There was the former head of China’s largest policy bank, who accepted bribes to approve a $4.8 billion credit line to a conglomerate that failed shortly after. Another state-owned bank executive used carefully structured shadow firms to receive 10 million yuan in kickbacks for approving real-estate loans of more than 4 billion yuan to a single developer… The recent investigation into 25 entities marks the first systematic review of the financial sector since 2015, and last month, when it concluded, the nation’s top disciplinary watchdog sharply criticized financial institutions and regulators for prominent corruption and insufficient risk monitoring – problems it said were ‘common.’”

March 25 – Bloomberg: “The biggest exchange-traded fund tracking yuan bonds recorded a whopping $460.4 million of outflows so far this month, adding to recent signs of an exodus from Chinese assets… Exante Data, which analyzes trends in global capital flows, says weekly flows data for March suggest the retreat from Chinese assets is gathering pace. ‘The Russian invasion of Ukraine has essentially brought into play a new downside scenario for Western holders of Chinese bonds, whereby sanctions and debanking, and the reciprocal use of capital controls, pose a non-negligible yet catastrophic risk,’ Grant Wilson, Exante’s head of Asia Pacific, said…”

March 22 – Financial Times (Joe Rennison and Thomas Hale): “A group of bondholders is moving closer to formal legal action against Evergrande after the world’s most indebted property developer made a surprise disclosure that mystery lenders to one of its subsidiaries claimed more than $2bn in cash. A group of distressed debt investors in the US and UK including Saba Capital, Redwood Capital Management and Ashmore met on Tuesday and directed lawyers to begin work on the legal analysis needed to decide whether to take action against Evergrande… One person directly involved in the situation said investors feel they have ‘no choice’ but to commence legal action and that plans were already prepared. ‘I think it has massively changed the game,’ the person said about the $2bn claim. ‘The atmosphere in the room is one of boiling blood.’”

March 22 – Reuters (Clare Jim, Jason Xue and Shuyan Wang): “Embattled China Evergrande Group will unveil a debt restructuring proposal for its creditors by the end of July, it said…, after concerns about its financial health were renewed by a delay in publishing its annual results. Evergrande, whose $22.7 billion worth of offshore debt is deemed to be in default, is seeking to ‘further enhance communications’ with creditors to reach the end-July target, its executive director Siu Shawn told investors on a call.”

March 21 – Financial Times (Thomas Hale): “Lenders to a property services unit of China Evergrande Group have claimed more than $2bn of its cash, dealing a blow to international investors in the heavily indebted real estate developer who were hoping to recoup some of their losses through the subsidiary. The claim stands to hit the remaining value of Evergrande’s international bonds, which are already trading at a fraction of their $20bn face value… A bond maturing in 2025 is trading at 13 cents on the dollar. Evergrande said in a… filing… that lenders had taken over Rmb13.4bn ($2.1bn) of the subsidiary’s deposits that were pledged as security for ‘third party guarantees’. It did not give further details or identify the lenders.”

March 20 – Wall Street Journal (Cao Li): “According to government statistics, China’s housing market has cooled from its hot gains of years past but is still ticking along. The average new-home price rose 1.7% year over year in January and 1.2% in February. Yet financial filings, marketing materials for apartments, property agents and analysts tell a different story: Debt-burdened developers are selling apartments at falling prices and in some cases providing big discounts to get cash in the door. Since last summer, most residential real-estate developers in China have reported steep drops in contracted sales. Many have also disclosed substantial declines in average selling prices this year, according to a Wall Street Journal analysis of their monthly stock-exchange filings.”

March 23 – Wall Street Journal (Clarence Leong and Cao Li): “China’s property sector is in deep trouble—but it will be some time before investors can see the full extent of the damage. In the past week, six developers, including the major international borrowers China Evergrande Group and Kaisa Group Holdings Ltd., said they couldn’t publish audited annual results by Hong Kong’s March 31 deadline, with some blaming pandemic-related problems… Others have recently parted company with the accountancy firms that previously audited their books. The information vacuum could further damage confidence…”

March 21 – Bloomberg: “Chinese local governments’ revenue from land sales contracted 29.5% in January-February from the same period a year ago, the biggest slump for the period since at least 2015 when comparable data begins… The figures underscore the impact the continued housing slump is having on government finances at a time when local authorities are under enormous pressure to bolster economic growth by spending more on infrastructure. Goldman Sachs… estimates that combining income from land sales and property-related taxes, government revenue directly from the real estate sector shrank by 23.5% in January-February from a year ago…”

March 21 – Dow Jones (Yoko Kubota): “China’s biggest tech companies are conducting large-scale layoffs this year as they deal with an economic slowdown and Beijing’s regulatory pressure. Tencent Holdings Ltd., operator of the popular chat, social media and payments app WeChat, is planning to cut thousands of employees in some of its biggest business units this year, including around a fifth of the staff at its cloud unit, people familiar with the matter said.”

March 23 – Bloomberg (Zheping Huang): “Tencent Holdings Ltd. pledged to embrace China’s new paradigm of stricter government oversight after reporting its slowest growth on record, declaring the end of an era that nurtured some of the world’s largest and most profitable corporations.”

Central Banker Watch:

March 21 – Bloomberg (William Horobin): “European Central Bank President Christine Lagarde played down fears about euro-area stagflation, despite Russia’s invasion of Ukraine starting to weigh on the economy while further stoking already-record gains in consumer prices. The war will have ‘consequences’ for growth as inflation quickens and confidence is damaged, Lagarde told a conference… The difficulty for central banks is to maintain price stability without hurting activity, she said. Asked about the risk of stagflation, Lagarde said that ‘even in the bleakest scenario, with second-round effects, with a boycott of gas and petrol and a worsening of the war that goes on for a long time — even in those scenarios we have 2.3% growth.’”

March 21 – Bloomberg (Carolynn Look and Alexander Weber): “The European Central Bank shouldn’t postpone increasing interest rates from record lows if inflation demands it, and may be able to start doing so in 2022, according to Governing Council member Joachim Nagel. If the ECB ends net bond-buying as planned in the third quarter, ‘this opens up the possibility of raising interest rates this year, if needed,’ Nagel, who heads Germany’s Bundesbank, said… ‘It’s very clear to me that if the price outlook requires it, we must continue to normalize monetary policy and also start raising our key interest rates… We mustn’t delay the exit from very loose monetary policy.’”

Global Bubble Watch:

March 21 – Bloomberg (Jacqueline Poh): “Firms across the globe are ditching fund-raising deals at a quickening pace, as volatility destabilizes credit markets following Russia’s invasion of Ukraine. Electric car giant Tesla Inc. is the latest big name firm to scrap financing plans, as it postponed a $1 billion offering of bonds backed by leases on its vehicles last week. Almost 80 companies, nearly half from the U.S., have put at least $25 billion of deals on hold since the start of the war nearly a month ago.”

Europe Watch:

March 21 – Reuters (Miranda Murray): “German producer prices maintained their record-breaking rise in February, increasing 25.9% year on year mainly because of energy prices… The jump in factory gate costs, considered a leading indicator for consumer prices, was the biggest since 1949, the statistics office said.”

March 25 – Bloomberg (Carolynn Look): “German business confidence plunged to the lowest level since the early months of the pandemic after Russia’s invasion of Ukraine clouded the outlook and caused energy prices to soar. A business-expectations gauge compiled by the Munich-based Ifo Institute fell to 85.1 in March from 98.4 in February — more than all but one of 27 economists predicted in a Bloomberg survey and the worst reading since May 2020.”

March 24 – Reuters (Bozorgmehr Sharafedin and Rowena Edwards): “European economies face the risk of a shortage of diesel, the preferred fuel for heavy industry, as sanctions on Russian energy threaten to disrupt imports while supply from elsewhere remains limited. Russia is Europe’s largest supplier of diesel and related fuels, sending over three quarters of a million barrels per day for use in European heavy machinery, transportation, farming, fishing and for power and heating.”

March 23 – Bloomberg (Andrew Langley): “Euro-area consumer confidence slumped to its lowest level since the early months of the pandemic as Russia’s invasion of Ukraine pushed up energy prices and threatened to exacerbate already-record inflation. A monthly gauge from the European Commission showed a reading of -18.7 in March — down from -8.8 in February and worse than all but one prediction in a Bloomberg survey of 25 economists.”

March 24 – Reuters (Jonathan Cable): “Euro zone business growth was stronger than expected this month, a survey showed…, although prices rose at a record pace, likely adding to pressure on the European Central Bank to raise interest rates. However, some of that expansion came from a rebound following the lifting of COVID restrictions and the outlook is murky as supply chain issues caused by the coronavirus pandemic have worsened following Russia’s invasion of Ukraine.”

Japan Watch:

March 22 – Bloomberg (Shoko Oda and Stephen Stapczynski): “Japan’s worst power crisis in over a decade is a culmination of events starting from the Fukushima disaster, and is an issue that the nation won’t be able to quickly shake. The world’s third-largest economy has been running on a thinner supply of electricity since the triple meltdown at Fukushima in March 2011 shut its massive fleet of nuclear reactors. Market reforms over the next 10 years that aimed to boost security of supply and make the grid cleaner led to utilities retiring inefficient and dirty power plants, crimping resources further. That set the background for the current scenario. A strong earthquake last week stretched the power grid…”

Covid Watch:

March 22 – Reuters (Michael Erman and Bhanvi Satija): “About one-in-three COVID-19 cases in the United States are now caused by the BA.2 Omicron sub-variant of the coronavirus, according to government data… that also showed overall infections still declining from January’s record highs. Despite the rise of the extremely contagious sub-variant also seen in other countries, U.S. health experts say a major wave of new infections here appears unlikely.”

March 25 – Bloomberg: “Shanghai’s new Covid-19 cases jumped more than 60% in a single day, hitting a record 1,609 on Friday, even as authorities widened restrictions that have limited access to food and medical care with devastating consequences… Scores of buildings and apartment blocks remained locked down in the Chinese financial hub amid the growing outbreak, part of a wave that’s challenging China’s zero-tolerance approach… Frustrated residents are struggling to secure fresh food as some compounds refuse to let them leave, while accessing medical care gets harder…”

March 23 – Reuters (David Stanway and Roxanne Liu): “Authorities in the Chinese city of Shanghai have denied rumours of a city-wide lockdown after a sixth straight increase in daily asymptomatic coronavirus cases pushed its count to record levels despite a campaign of mass testing aimed at stifling the spread… Daily new local COVID-19 infections in Shanghai neared 1,000 on Tuesday, but authorities vowed to stick with a ‘slicing and gridding’ approach to screen neighbourhoods one by one, rather than shut down entirely.”

March 22 – Reuters (Min Zhang and Twinnie Siu): “China’s top steelmaking city Tangshan implemented a temporary lockdown… to avoid further cases of COVID-19 as infections surged, the local government said… Residents should not leave their houses or buildings except for tests or emergencies pending further announcement, the government said.”

March 22 – Reuters (David Stanway): “In footage shared on social media last week, a crowd of people in the northeastern Chinese city of Shenyang bang against the windows of a clothing market as they shout in frustration at the announcement of yet another round of COVID-19 tests. Though the local government quickly urged people not to ‘spread rumours’ about the incident, the response from netizens was immediate. ‘Refuse quarantine!’ said one. ‘Many people have awoken to the truth,’ said another.”

Social, Political, Environmental, Cybersecurity Instability Watch:

March 20 – Bloomberg: “China’s increased reliance on coal to combat an energy shortage was never going to bode well for its ambitions to cut planet-warming emissions. Now, thanks to new analysis of satellite data, the effects of that climate choice could already be evident from space. A plume of methane, which traps over 80 times more heat than carbon dioxide in its first two decades in the atmosphere, was detected by the European Space Agency’s Sentinel-5P satellite near a remote coal mine in Inner Mongolia… The Sentinel-5P had never before spotted the powerful greenhouse gas in that location, suggesting new or expanded activity.”

March 18 – Associated Press (Seth Borenstein): “Earth’s poles are undergoing simultaneous freakish extreme heat with parts of Antarctica more than 70 degrees warmer than average and areas of the Arctic more than 50 degrees warmer than average. Weather stations in Antarctica shattered records Friday as the region neared autumn. The two-mile high Concordia station was at 10 degrees,which is about 70 degrees warmer than average, while the even higher Vostok station hit a shade above 0 degrees, beating its all-time record by about 27 degrees, according to… Maximiliano Herrera.”

Leveraged Speculation Watch:

March 21 – Yahoo Finance (Alexandra Semenova): “As Western sanctions pummeled Moscow’s financial system in recent weeks, hedge fund investors in Russian securities were hit hard by the fallout. Russian and European hedge funds plunged 36% in the first two months of 2022, according to… Hedge Fund Research (HFR). Losses came amid a barrage of economic penalties from the United States and European Union, a collapse in the Russian ruble, and heightened risk of default on Russian bonds.”

Geopolitical Watch:

March 21 – Bloomberg: “Xi Jinping bet that establishing a ‘no limits’ friendship with Vladimir Putin could prevent the U.S. from containing China. Now that agreement threatens to leave Beijing more isolated and alone. A phone call between Xi and U.S. President Joe Biden on Friday appeared to achieve no major breakthroughs. The U.S. continued to threaten unspecified consequences if China provides support to Russia, and Beijing insisted it was supporting peace talks while blaming the U.S. for triggering the conflict. That dynamic so far appears to be pushing more countries to the U.S. camp, with the European Union set to reinforce the American warning to Beijing at a virtual summit planned for April 1. China, meanwhile, is struggling to convince the world it’s a neutral player, as assurances to international audiences are undermined by messages at home affirming the China-Russia partnership.”

March 24 – Financial Times (Demetri Sevastopulo): “Russia’s invasion of Ukraine has underscored the serious threat that China poses to Taiwan as its military ratchets up pressure on the island, the top US military commander in the Indo-Pacific region has warned. Admiral John Aquilino, head of Indo-Pacific Command, said China had displayed a ‘boldness’ over the past year that ranged from its increasingly assertive military activity near Taiwan and other parts of the South China Sea to its rapid nuclear expansion and a hypersonic weapon test in July. ‘I don’t think anyone five months ago would have predicted an invasion of the Ukraine. So I think the number one lesson is: ‘Hey, this could really happen… Number two, don’t be complacent . . . We have to be prepared at all times.’”

March 19 – Reuters (Ryan Woo): “The U.S. destroyer Ralph Johnson’s sail-through of the Taiwan Strait on March 17 was a ‘provocative’ act by the United States and sent the wrong signals to pro-Taiwan independence forces, the Chinese military said…. Such an act was ‘very dangerous’, a Chinese military spokesperson said in a statement, adding that troops were organised to monitor the Ralph Johnson’s passage.”

March 22 – Bloomberg (Andreo Calonzo): “The U.S. and Philippines will hold their biggest military drills in three decades as tensions grow with China, injecting new life into a defense alliance that had languished in recent years. Some 5,100 American soldiers and 3,800 Philippine military members will train in the Southeast Asian nation from March 28 to April 8…”

March 24 – Financial Times (Christian Davies): “North Korea… claimed to have successfully tested its longest-range intercontinental ballistic missile yet, saying its nuclear forces were ‘fully ready to thoroughly check and contain any dangerous military attempts of the US imperialists’. The claims came after Pyongyang… raised tensions in East Asia by testing a missile the South Korean military said reached an altitude of more than 6,000km — the highest a North Korean missile has ever flown.”

March 24 – Reuters (Hyonhee Shin): “South Korea’s President Moon Jae-in said on Thursday North Korean leader Kim Jong Un had broken a moratorium on launching intercontinental ballistic missiles, strongly condemning the latest missile test…”

March 20 – Bloomberg (Omar Tamo and Mohammed Hatem): “Yemen’s Houthi rebels attacked at least six sites across Saudi Arabia late Saturday and early on Sunday, including some run by state oil giant Saudi Aramco. The Iran-backed group targeted an Aramco fuel depot in Jazan in the southwest of the kingdom and a liquefied natural gas plant in the Red Sea city of Yanbu…”