MARKET NEWS / CREDIT BUBBLE WEEKLY

April 14, 2023: Perilous “Money”

MARKET NEWS / CREDIT BUBBLE WEEKLY
April 14, 2023: Perilous “Money”
Doug Noland Posted on April 15, 2023

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April 10 – Bloomberg (Catarina Saraiva): “Federal Reserve Bank of Chicago President Austan Goolsbee said the US central bank should exercise ‘prudence and patience’ in raising interest rates as policymakers assess just how much last month’s banking turmoil will contribute to tighter lending conditions. ‘Given how uncertainty abounds about where these financial headwinds are going, I think we need to be cautious,’ Goolsbee said in prepared remarks… ‘We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation.’”

Reasonable enough. With bank lending tightening, it seems prudent for the Fed to hit the pause button. The problem is that markets eagerly anticipate the day the Fed backpedals from its inflation fight at the first sign of instability.

When market instability surfaced early in the summer in 2013, Bernanke reassured markets that the Federal Reserve was prepared to “push back” against tightening financial conditions. When Yellen’s baby-step 25 bps increase off the zero bound rattled markets in December 2015, the Fed waited a full year before the next little one. Powell responded to mid-2019 money market unrest with a “mid-cycle adjustment” rate cut (to 2.00%) and the restart of QE. The Powell Fed then opened the monetary floodgates in March 2020 – and didn’t get rates back above 1% until June 2022.

Understandably, markets are conditioned for loose conditions, expecting Fed loosening measures to reverse any meaningful tightening. The Nasdaq100 sports an almost 20% y-t-d gain. The VIX (equities volatility) Index closed Friday trading at 17.07, the low since January 2022. The rates market currently prices two 25 bps rate cuts between July and December. Despite elevated inflation, 10-year Treasury yields remain at a historically low 3.50%.

I appreciate Austan Goolsbee and others fretting that Fed tightening measures will push the U.S. economy into recession. I take a different view: Post-Bubble recession is both unavoidable and necessary. My worries are elsewhere.

I began warning about the emerging “global government finance Bubble” in 2009, after contemplating the incredible reflationary monetary and fiscal policy responses to the 2008 crisis. I had zero confidence that the right lessons had been learned. Never, however, did I imagine chronicling this Bubble in 2023 – with the Fed’s balance sheet at $8.6 TN and outstanding Treasuries at $27 TN – both having inflated about four-fold.

I worry most about a mounting systemic crisis of confidence in monetary policy, government debt, market structure, and finance more generally. I see hopelessly dysfunctional markets, distorted from years of low rates, interminable liquidity excess, and habitual market interventions and bailouts. I fear a stock market, incapable of adjustment, increasingly vulnerable to dislocation and panic. I see a Treasury market where yields are completely divorced from an unending massive supply of new debt securities. Devoid of market discipline, Washington politicians will continue to bankrupt the country in debt and inflation.

So far, the bank crisis and extraordinary liquidity responses from the Fed and FHLB have spurred a loosening of market financial conditions.

April 10 – Bloomberg (Austin Weinstein): “The Federal Home Loan Bank system issued $37 billion in debt in the last week of March, a sharp drop-off from the $304 billion two weeks earlier… Short-term issuance — notes with terms from one day to one year — fell sharply. It reached a peak of $153 billion for the week ended March 17… That issuance fell to $32.2 billion the next week and then declined to $17.6 billion the week ended March 31… The system’s bond issuance — with durations generally over one year — has also tumbled. The system issued $151 billion in bonds the week after Silicon Valley Bank was put into receivership, $40.1 billion the next week and then $19.8 billion the week ended March 31.”

We’ll have to wait for official data, but we can assume the FHLB boosted loans/advances to member financial institutions (in the neighborhood of) an unprecedented $400 billion in the wake of the SVB collapse. Coupled with Fed lending facilities, it has been another bout of historic liquidity injections.

April 11 – Bloomberg (Austin Weinstein): “Two housing-policy experts whose previous recommendations have been closely followed by the Biden administration are defending the Federal Home Loan Banks, raising the stakes in a debate over whether a major overhaul is needed. The new paper from Jim Parrott and Mark Zandi is an opening salvo in what will likely be a high-stakes battle over the future of the lenders. The FHLB system has come under fire in recent weeks for loans made to now-collapsed financial institutions Silicon Valley Bank, Signature Bank and Silvergate Capital Corp. FHLB loans come with favorable interest rates due to implied US government backing, despite the banks being cooperatives owned by financial institutions. Critics say they can encourage risky behavior by financial firms.”

Jim Parrott (Parrott Ryan Advisors) and Mark Zandi (chief economist at Moody’s Analytics) are seasoned analysts. Their paper, “In Defense of the Federal Home Loan Banks,” is informative, relatively comprehensive, and well-researched.

“Critics contend that the FHLBs distort the financial system by crowding out deposits and depressing deposit rates, relying too heavily on money market funds for their funding, and potentially disrupting the federal funds market. Each of these criticisms is overstated if not misplaced.”

“Critics also argue that the FHLBs can be a source of systemic instability in a crisis. Most recently, they have claimed that the FHLBs’ funding of Silvergate and Silicon Valley Bank shows that the FHLBs’ lack of oversight and restrictions on the use of their advances accelerates rather than mitigates risk in a time of stress. While this concern is not surprising as policymakers work to understand the causes of these failures, it too is misplaced here.”

“It is important to keep in mind that the FHLBs are designed to be a bulwark against instability through the cycle. Their explicit and implicit support from the government reduces the pressure that the system faces in times of stress, keeping the cost of their debt low and stable.”

“If anything, the FHLB system should be expanded to provide that support more broadly and effectively in an ever-changing mortgage market and financial system.”

The FHLB, along with Fannie Mae, was created as part of Washington’s response to the banking collapse and Great Depression. Over recent decades, the GSEs have inflated into massive and powerful lenders and liquidity providers. They have been instrumental players in historic Credit excess – fundamental to the Great Credit Bubble.

A Bubble fueled by risky Credit will generally not pose major systemic risk. I have over the years explained how a Bubble financed by junk bonds wouldn’t get too far out of hand before buyers reached the point of “have enough, no more risky junk!” Such risk aversion would conclude the boom. Importantly, junk bond risks are self-evident, transparency that works to ensure that market dynamics regulate prices and issuance. There can certainly be excess and speculative Bubbles – but not of the dangerously protracted and deeply systemic variety.

Conversely, a Bubble fueled by “money” is a much more threatening animal. With perceived safe and liquid Credit instruments essentially enjoying insatiable demand, money-like Credit instruments are powerful sustenance for prolonged, structure-altering, and deeply systemic Bubbles. When it comes to “money,” risks are well-concealed and amass surreptitiously over years. Many of us innately have demands for as much “money” as we can get our hands on, with this dynamic disabling market processes.

Beginning the year at zero, Silicon Valley Bank borrowed $15 billion from the FHLB in 2022. SVB’s securities portfolio was declining in value last year, while the bank was losing deposits. The environment was turning against the bank. Management should have been reducing the size and risk profile of its securities portfolio, shrinking its balance sheet in preparation for a challenging environment. Instead, they, along with many peers, simply leaned on cheap and readily available FHLB liquidity.

The FHLB was operating as a central bank liquidity backstop, but without the stigma associated with borrowing at the Fed’s discount window. Member bank managements could disregard risky securities portfolios, asset/liability mismatches, and depositor flight risk – confident the FHLB had their backs. If this hasn’t illuminated a perilous market distortion, I don’t know what it will take. More troubling, we’ve witnessed the peril of this type of moral hazard before. Lessons never learned.

The great mortgage finance bubble was initially pierced when two Bear Stearns structured Credit funds began to collapse in June 2007, marking an abrupt end to the subprime mortgage boom. Not coincidently, FHLB “Loans and Advances” (from Z.1) surged $180 billion during Q3 2007, a four-fold increase from its previous record set during the Russia/LTCM crisis period (Q4 1998). And over the four quarters Q3 2007 through Q2 2008, total GSE Assets inflated a record $1.564 TN. Powered by the GSEs, Financial Sector borrowings expanded a record $2.043 TN, or 13.5%, in 2007. Financial Sector borrowings increased $1.745 TN in 2022, by far the strongest expansion since 2007. GSE Assets were up an annual record $921 billion last year to $9.224 TN.

Did 2007’s wild late-cycle Monetary Inflation mitigate or exacerbate systemic risk? From my perspective, clearly it was a factor in the near system collapse that unfolded in late-2008. I’m hard pressed to see how system stability was bolstered by prolonging the boom another year. The sooner a system begins post-Bubble adjustment, the better. And I strongly argue that systemic risk rises parabolically late in the cycle. Prolonging a Bubble an additional year – with associated Monetary Disorder – ensures significantly greater market, financial and economic dislocation. On a micro level, SVB management could have saved the bank in 2022.

Recall that after subprime-related market weakness, the S&P500 rallied 15% off August lows to a record high in October 2007. Moreover, in mid-May 2008, the S&P500 was still above the subprime trading low level and less than 9% below the all-time high. An over-liquefied and highly speculative marketplace was incapable of an orderly adjustment to the collapsing mortgage finance Bubble.

Some Monetary Disorder manifestations were more conspicuous. From late June 2007 to its peak in early-July 2008, the Bloomberg Commodities Index jumped almost 40%. Over this period, crude went on a moonshot, surging from $65 to a July 11, 2008, intraday peak of $147. CPI (y-o-y) reached a 17-year high 5.6% in July 2008. Yet despite surging crude, commodities and consumer price inflation, 10-year Treasury yields were more than 100 bps lower in July 2008 (compared to June 2007).

A prescient bond market discounted the approaching “accident”. Rising bond prices/lower market yields threw gas on destabilizing stock market and commodities speculation. The confluence of massive GSE/Financial Sector liquidity creation and 300 bps of Fed rate cuts prolonged speculative excesses, ending with a near market meltdown – the so-called Great Financial Crisis.

Today’s parabolic phase of the “global government finance Bubble” runs unabated.

April 8 – Reuters (Lindsay Dunsmuir): “The U.S. government recorded a $378-billion budget deficit in March as outlays outpaced revenues… That compared to a budget deficit of $193 billion in the same month last year… Analysts… had forecast a $302 billion deficit for the month. The March deficit brought the year-to-date fiscal deficit to $1.1 trillion, up 65% from a year earlier… Unadjusted receipts last month totaled $313 billion, down 1% from $315 billion in March 2022, while unadjusted outlays were $691 billion, an increase of 36% from the same month a year earlier.”

April 14 – Bloomberg (Silla Brush): “BlackRock Inc.’s assets swelled to $9.09 trillion in the first quarter as depositors sought cover following the collapse of several US banks by pouring money into the firm’s cash-management funds. Net flows into all of the firm’s funds totaled $110 billion…, with investors and clients adding money to bond ETFs. Long-term investment products, which include mutual funds and ETFs, added $103 billion…”

April 14 – Reuters (Harry Robertson): “Investors have moved $538 billion into cash funds over the past eight weeks as they pulled money out of bank deposits after the collapse of Silicon Valley Bank, according to Bank of America… BofA, citing EPFR data, said investors put $51.6 billion into money market funds in the week to Wednesday as the outsized flows continued.”

Money market fund assets surged $384 billion over the past five weeks to a record $5.277 TN, with year-to-date growth of $463 billion, or 42% annualized. In the 15 months leading up to the GFC (June 2007 to September 2008), money fund assets surged $1.055 TN, or 42%.

Extreme inflations of “Money” are perilous. They tend to fuel late-stage Bubble excess and inflation, setting the stage for crises of confidence. Money is perceived as a liquid and stable store of nominal value. As some small and mid-sized banks have recently come to appreciate, instability erupts when risk-averse holders question “money’s” soundness. Exit immediately and ask questions later.

The incredible growth of (perceived safe and liquid) money-like money market funds and ETFs has Fed and GSE fingerprints all over it. A thought on the market pricing a 50 bps lower policy rate by year end: It is not so much that markets believe the Fed will cut rates twice – in response to an economic downturn. It’s more the market pricing in probabilities of the Fed being forced to reverse course – probabilities of an “accident”. Think perhaps of a 50% probability of an accident forcing the Fed to slash rates 100 bps.

European bonds were hit hard this week, with French yields up 31 bps, German 26 bps, and Italian yields 27 bps. At Thursday’s close, 10-year Treasury yields had only increased five bps. It was as if the Treasury market had such market conviction for the “accident” scenario that it could now ignore rising global bond yields and “risk on” equities. Meanwhile, equities were getting pretty excited by the prospect of FOMO (fear of missing out) taking hold without the fear of the stock rally getting slammed by spiking market yields.

With options expiration this coming Friday, the market has again worked its magic to ensure a lot of hedges expire worthless. I’m with the bond market for the possibility of an accident this year. I just believe the odds are higher.

For the Week:

The S&P500 increased 0.8% (up 7.8% y-t-d), and the Dow gained 1.2% (up 2.2%). The Utilities fell 1.4% (down 2.8%). The Banks jumped 3.2% (down 17.7%), and the Broker/Dealers rose 3.7% (up 1.4%). The Transports advanced 2.0% (up 6.4%). The S&P 400 Midcaps rallied 1.7% (up 2.4%), and the small cap Russell 2000 recovered 1.5% (up 1.1%). The Nasdaq100 was little changed (up 19.6%). The Semiconductors were unchanged (up 21.3%). The Biotechs were about unchanged (up 2.1%). Though bullion slipped $4, the HUI gold equities index increased 0.7% (up 19.1%).

Three-month Treasury bill rates ended the week at 4.86%. Two-year government yields jumped 12 bps this week to 4.10% (down 33bps y-t-d). Five-year T-note yields rose 11 bps to 3.61% (down 40bps). Ten-year Treasury yields gained 12 bps to 3.51% (down 36bps). Long bond yields rose 12 bps to 3.74% (down 23bps). Benchmark Fannie Mae MBS yields increased 10 bps to 5.18% (down 21bps).

Greek 10-year yields surged 21 bps to 4.28% (down 28bps y-o-y). Italian yields jumped 27 bps to 4.30% (down 40bps). Spain’s 10-year yields rose 25 bps to 3.48% (down 4bps). German bund yields surged 26 bps to 2.44% (unchanged). French yields jumped 31 bps to 3.01% (up 3bps). The French to German 10-year bond spread widened five to 57 bps. U.K. 10-year gilt yields rose 24 bps to 3.67% (down 1bp). U.K.’s FTSE equities index rose 1.7% (up 5.6% y-t-d).

Japan’s Nikkei Equities Index surged 3.5% (up 9.2% y-t-d). Japanese 10-year “JGB” yields added a basis point to 0.48% (up 5bps y-t-d). France’s CAC40 jumped 2.7% (up 16.2%). The German DAX equities index gained 1.3% (up 13.5%). Spain’s IBEX 35 equities index increased 0.5% (up 13.8%). Italy’s FTSE MIB index rose 2.4% (up 17.6%). EM equities were higher. Brazil’s Bovespa index surged 5.4% (down 3.1%), and Mexico’s Bolsa index advanced 1.8% (up 12.4%). South Korea’s Kospi index jumped 3.3% (up 15.0%). India’s Sensex equities index gained 1.0% (down 0.7%). China’s Shanghai Exchange Index added 0.3% (up 8.1%). Turkey’s Borsa Istanbul National 100 index jumped 3.4% (down 7.6%). Russia’s MICEX equities index gained 1.9% (up 18.6%).

Investment-grade bond funds posted inflows of $1.129 billion, and junk bond funds reported positive flows of $235 million (from Lipper).

Federal Reserve Credit declined $12.7bn last week to $8.586. TN. Fed Credit was down $281bn from the June 22nd peak. Over the past 186 weeks, Fed Credit expanded $4.860 TN, or 130%. Fed Credit inflated $5.776 Trillion, or 205%, over the past 544 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt gained $11.7bn last week to $3.331 TN. “Custody holdings” were down $130bn, or 3.8%, y-o-y.

Total money market fund assets jumped $30.3bn to a record $5.277 TN, with a five-week gain of $384 billion. Total money funds were up $718bn, or 15.7%, y-o-y.

Total Commercial Paper gained $11.5bn to $1.146 TN. CP was up $76bn, or 7.1%, over the past year.

Freddie Mac 30-year fixed mortgage rates gained eight bps to 6.34% (up 134bps y-o-y). Fifteen-year rates rose eight bps to 5.61% (up 144bps). Five-year hybrid ARM rates jumped 16 bps to 5.71% (up 202bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 11 bps to 6.86% (up 185bps).

Currency Watch:

April 13 – Bloomberg (Chester Yung): “Hong Kong’s interbank liquidity is approaching the lowest level in three years following a series of intervention by the city’s de facto central bank to defend the local currency’s peg to the dollar. The Asian financial hub’s aggregate balance stands at HK$57.2 billion ($7.3bn) Friday, a whisker away from the HK$54 billion floor seen in much of 2019 and early 2020.”

For the week, the U.S. Dollar Index declined 0.5% to 101.55 (down 1.9% y-t-d). For the week on the upside, the Brazilian real increased 3.0%, the South Korean won 1.4%, the Swedish krona 1.4%, the Swiss franc 1.3%, the Norwegian krone 1.1%, the Canadian dollar 1.0%, the euro 0.8%, the Mexican peso 0.7%, the South African rand 0.6%, and the Australian dollar 0.5%. On the downside, the Japanese yen declined 1.2% and the New Zealand dollar dipped 0.7%. The Chinese (onshore) renminbi was little changed versus the dollar (up 0.43%).

Commodities Watch:

April 13 – Wall Street Journal (Hardika Singh): “Gold prices hit their highest level of the year on Thursday, driven by bets that inflation will remain sticky despite recent declines. The most actively traded gold-futures contract rose to $2,055.30 a troy ounce, up 13% year to date. That also put it within striking distance of its record high, reached in the summer of 2020. Some investors value gold as a hedge against inflation, expecting the precious metal to hold up in value if other assets fall.”

The Bloomberg Commodities Index gained 1.5% (down 4.4% y-t-d). Spot Gold slipped 0.2% to $2,004 (up 9.9%). Silver gained 1.5% to $25.35 (up 5.8%). WTI crude increased $1.82, or 2.3%, to $82.50 (up 3%). Gasoline added 0.8% (up 15%), and Natural Gas rallied 5.1% to $2.11 (down 53%). Copper recovered 2.3% (up 8%). Wheat jumped 2.5% (down 13%), while Corn declined 1.2% (down 6%). Bitcoin jumped $2,580, or 9.2%, this week to $30,480 (up 84%).

Global Bank Crisis Watch:

April 13 – Bloomberg (Catarina Saraiva): “Banks reduced their borrowings from two Federal Reserve backstop lending facilities for a fourth straight week as liquidity constraints continue to ease following the collapse of Silicon Valley Bank last month. US banks had a combined $139.5 billion in outstanding borrowings in the week through April 12, compared with $148.7 billion the previous week… Data showed $67.6 billion in outstanding borrowing from the Fed’s traditional backstop lending program, known as the discount window, compared with $69.7 billion the previous week and a record $152.9 billion reached last month.”

April 13 – Bloomberg: “China’s megabanks are planning at least 40 billion yuan ($5.8bn) of bond sales, kicking off a major funding push to comply with global capital requirements by early 2025. Industrial & Commercial Bank of China Ltd. and its three closest rivals are planning to tap domestic debt markets to sell a new category of total loss-absorbing capacity bonds as soon as June… China’s big banks have typically relied on so-called additional Tier-1 and Tier-2 bonds in recent years to replenish capital. But the lenders are now seeking to issue a more senior type of TLAC bond that can also be used toward meeting regulatory requirements.”

April 12 – Financial Times (Laura Noonan): “The global finance system’s top regulator has urged officials to ‘learn lessons’ from the recent banking turmoil, saying the latest stresses were a reminder that financial stability is ‘not merely an abstract concept’. Klaas Knot, chair of the Financial Stability Board, wrote… that the need to tighten rules in response to the panic was ‘all the greater’ because, unlike other recent shocks to the global economy, such as the war in Ukraine and the coronavirus pandemic, ‘this latest episode had its origins within the financial system’. Knot, who is also president of the Dutch central bank, called out ‘bank prudential and resolution frameworks’ as one area of policy work, without giving further details.”

April 12 – Reuters (Douglas Gillison and Hannah Lang): “The Federal Deposit Insurance Corp is expected to propose next month how to make the U.S. banking sector pay for an estimated $23 billion hole in its insurance fund by the collapse of Silicon Valley Bank and Signature Bank in March. The agency has broad authority in setting the terms of what is known as a ‘special assessment’ to fill the gap and precisely what this will look like is still an open question. Banking trade organizations tell Reuters they have yet to hear specifics about the assessment.”

Market Instability Watch:

April 11 – Bloomberg (Alexandra Harris): “Treasury inflows from overseas have collapsed after rebounding earlier in the year as the tumult in the US banking sector has chased away buyers, according to Bank of New York Mellon Corp. After the failure of three American banks in March, flows from abroad have been ‘quite negative,’ John Velis, currency strategist at BoNY, wrote… ‘The 20-day rolling average of scored daily flows is now as negative as it’s been in over two years.’”

April 13 – Financial Times (Kate Duguid, Lauren Fedor and Colby Smith): “The cost of buying insurance against a US government default has shot to its highest level in more than a decade, in an early sign of market concerns about the political impasse in Washington over the debt ceiling. Amid a stalemate between the White House and congressional Republicans on raising the federal borrowing limit, the price of five-year credit default swaps… reached its highest since 2012 this month.”

April 12 – Reuters (Andrea Shalal): “Public debt is higher and growing faster than projected before the COVID-19 pandemic, driven mainly by the United States and China, the world’s two largest economies, the International Monetary Fund’s top fiscal expert said… Sixty percent of countries are projected to see their public debt to gross domestic product (GDP) ratios decline through 2028 after COVID-related surges, but a significant number of large economies, including Brazil, China and the United States, are seeing rapid growth in their debt-to-GDP ratios.”

April 12 – Financial Times (Steve Johnson): “Flows into exchange traded funds almost trebled to $62.1bn last month, with the bulk heading into safe assets like government debt as investors sought shelter from the recent banking crisis. Developed market government bond ETFs soaked up a record $33.2bn of the money, eclipsing the previous monthly peak of $27.4bn set in May 2022, according to… BlackRock. Exchange traded products investing in gold vacuumed up a further $1.7bn, the highest tally since April 2022 and partially reversing the $25.5bn of net outflows gold funds have suffered in the interim.”

April 14 – Bloomberg (Yumi Teso, Masaki Kondo and Olivia Raimonde): “Investors worried about the Bank of Japan’s threat to global markets have a chance to hear from those on the front lines in coming weeks. Japan’s life insurers, with combined assets of $2.9 trillion, will lay out their investment strategies for the fiscal year which began this month. A key constituent of the country’s investor base, their plans for foreign and domestic markets this year will help shine a light on how Japanese funds are positioning for a potential BOJ policy tweak.”

April 12 – Bloomberg (Sagarika Jaisinghani): “Sanguine stock investors are at risk of being rocked by volatility during the rest of 2023 as concerns about a recession intensify, Goldman Sachs Group Inc. strategists say. Stress in the banking sector and weaker economic data have increased the potential for bigger moves in the second quarter, the team led by Christian Mueller-Glissmann wrote…”

Bursting Bubble and Mania Watch:

April 11 – New York Times (Kurtis Lee): “California has often been at the country’s economic forefront. Now, as fears of a national recession continue to nag, the state is hoping not to lead the way there. While the California economy maintains its powerhouse status, outranking even those of most countries, the state’s most-powerful sectors — including tech companies and supply chain logistics — have struggled to keep their footing… Even the weather hasn’t cooperated… Thousands of Californians have been laid off in the last few months, the cost of living is increasingly astronomical, and Gov. Gavin Newsom revealed in January that the state faced a $22.5 billion deficit in the 2023-24 fiscal year — a plummet from the $100 billion surplus a year ago… The structure, which relies in large part on taxing the incomes of the wealthiest Californians, often translates into dips when Silicon Valley and Wall Street are uneasy, as they are now.”

April 10 – Bloomberg (Vlad Savov): “Apple Inc.’s personal computer shipments declined by 40.5% in the first quarter, the worst drop since the final three months of 2000… Shipments by all PC makers combined slumped 29% to 56.9 million units — and fell below the levels of early 2019 — as the demand surge driven by pandemic-era remote work evaporated, according to IDC’s latest report. Among the market leaders, Lenovo Group Ltd. and Dell Technologies Inc. registered drops of more than 30%, while HP Inc. was down 24.2%.”

April 10 – Bloomberg (Scott Carpenter): “Bonds tied to commercial mortgages are getting punished as money managers fret that US regional bank blowups will cut the availability of credit… Risk premiums, or spreads, on the highest-rated commercial mortgage bonds averaged about 1.12 percentage point as of Thursday’s close. That’s close to the widest since the early part of the pandemic and before then, near the highest level since 2016.”

April 8 – Bloomberg (Neil Callanan): “Almost $1.5 trillion of US commercial real estate debt comes due for repayment before the end of 2025. The big question facing those borrowers is who’s going to lend to them? ‘Refinancing risks are front and center’ for owners of properties from office buildings to stores and warehouses, Morgan Stanley analysts including James Egan wrote… ‘The maturity wall here is front-loaded. So are the associated risks.’ The investment bank estimates office and retail property valuations could fall as much as 40% from peak to trough, increasing the risk of defaults. Adding to the headache, small and regional banks — the biggest source of credit to the industry last year — have been rocked by deposit outflows following the demise of Silicon Valley Bank, raising concerns that will crimp their ability to provide finance to borrowers.”

April 13 – Wall Street Journal (Carol Ryan): “An old design flaw in the commercial real-estate industry is back, and this time it is bigger and broader. Property investment funds have ballooned in size since the 2008 global financial crisis, and not just in the U.S. According to the European Central Bank, eurozone real-estate funds had assets under management of 1.04 trillion euros at the end of 2022, equivalent to $1.14 trillion and up from €200 billion in 2007. Some 80% of these funds by value are open-ended, giving investors the option to cash out daily, weekly or quarterly. Funds helped the real-estate industry to reduce its reliance on bank loans, which dried up for a while after 2008. Low interest rates also boosted property values and made it more appealing for retail and institutional investors to increase their exposure to real estate… But the funds are badly designed for downturns, when more investors ask for their money back. Managers may be forced to restrict withdrawals until they can raise cash by selling real estate.”

April 12 – Bloomberg (Hannah Miller): “Venture capitalists are continuing to pull back from crypto, an industry that’s been plagued by scandals, a market downturn and regulatory uncertainty. Private funding for crypto startups in the first quarter of this year plunged to its lowest level since 2020, according to… PitchBook. Global VC funding for the industry fell to $2.4 billion in the quarter, an 80% decline from its all-time high of $12.3 billion during the same period last year, according to PitchBook.”

April 9 – Wall Street Journal (Matt Wirz): “Private-equity funds went on a buying binge for food companies before markets crashed in 2022. Now they have indigestion that is contributing to rising prices at the grocery checkout. The funds snapped up a record 786 makers of food and beverages worth $32 billion in 2021, using bundles of debt to pay for their purchases… The financiers projected that staple goods would keep making profits no matter how the economy fared. But that forecast changed, with the food industry soon hammered by higher labor costs, supply-chain disruptions and surging inflation. Now food manufacturers are earning less cash to cover their heavy debt loads. The squeeze is heightening pressure to further raise prices that have skyrocketed over the past year.”

April 13 – Wall Street Journal (Angus Loten and Isabelle Bousquette): “Amazon.com Inc. is facing ‘short-term headwinds’ in its cloud-computing business, Amazon Web Services, as companies continue to look for ways to cut costs, Chief Executive Andy Jassy said… ‘One of the many advantages of AWS and cloud computing is that when your business grows, you can seamlessly scale up… Conversely, if your business contracts, you can choose to give us back that capacity and cease paying for it.’ Over roughly the past 15 years, many businesses have moved their data and applications to cloud services operated by AWS…, drawn by the promise of reducing the use of their own energy-guzzling data centers and being able to quickly scale up and down their IT processes as needed. But many companies have said they haven’t saved money by switching to the cloud, and some have seen their costs go up.”

April 12 – Financial Times (Harriet Clarfelt): “Investors are shying away from the riskiest US corporate debt as fears of an impending recession fuel a growing divide between the highest- and lowest-rated companies in the $1.4tn high-yield bond market. Last month’s banking crisis sparked a sell-off in so-called junk bonds of all stripes. But while higher-quality debt has clawed back its losses, investors have been reluctant to re-enter more speculative bets as they worry that an economic downturn could lead to defaults among the most indebted companies… An index of triple-C and lower bonds tracked by Ice Data Services currently yields 15.3 per cent — down slightly from a high of 15.6 per cent on March 20, but still well above levels from two months ago.”

April 13 – Bloomberg (David Pan): “The head of Commodity Futures Trading Commission admonished Binance Holdings Ltd over its compliance with US rules after the derivatives regulator sued the crypto exchange and its chief executive last month for a litany of alleged violations. “These are not unsophisticated individuals,” CFTC Chairman Rostin Behnam said… ‘They are starting large companies and offering futures contracts and derivatives to US customers.’”

April 11 – Bloomberg (Natalie Wong): “Blackstone Inc. has closed on its largest global property drawdown fund, targeting opportunistic deals across sectors such as rental housing, hospitality and data centers. The company secured $30.4 billion of total capital commitments for its latest global real estate fund, called Blackstone Real Estate Partners X…”

Ukraine War Watch:

April 11 – Reuters (Idrees Ali and Jonathan Landay): “U.S. national security agencies are reviewing how they share their most sensitive secrets inside the U.S. government, and dealing with the diplomatic fallout from the release of dozens of confidential documents, three U.S. officials said. Investigators are also working to determine what person or group might have had the ability and motivation to release the intelligence reports, said one of the officials. The leaks could be the most damaging release of U.S. government information since the 2013 publication of thousands of documents on WikiLeaks.”

U.S./Russia/China/Europe Watch:

April 10 – Associated Press (Huizhong Wu): “China’s military declared… it is ‘ready to fight’ after completing three days of large-scale combat exercises around Taiwan that simulated sealing off the island in response to the Taiwanese president’s trip to the U.S. last week. The ‘combat readiness patrols’ named Joint Sword were meant as a warning to self-governing Taiwan…, China’s military said earlier. ‘The theater’s troops are ready to fight at all times and can fight at any time to resolutely smash any form of ‘Taiwan independence’ and foreign interference attempts,’ it said…”

April 9 – Bloomberg (Jon Herskovitz): “A US Navy destroyer passed through waters claimed by Beijing in the South China Sea in a show of force that comes as the nation’s military holds drills around Taiwan. The USS Milius guided missile destroyer conducted ‘freedom of navigation operations Monday in the South China Sea near the Spratly Islands… The ship sailed within 12 nautical miles of Mischief Reef, where China has its largest outpost on artificial islands in the South China Sea and the closest to Philippine territory. ‘These operations demonstrate that the United States will fly, sail, and operate wherever international law allows — regardless of the location of excessive maritime claims and regardless of current events,’ it said.”

April 11 – Associated Press (Jim Gomez): “American and Filipino forces… launched their largest combat exercises in decades in the Philippines and its waters across the disputed South China Sea and the Taiwan Strait, where Washington has repeatedly warned China over its increasingly aggressive actions. The annual drills by the longtime treaty allies called Balikatan… will run up to April 28 and involve more than 17,600 military personnel. It will be the latest display of American firepower in Asia, as the Biden administration strengthens an arc of alliances to better counter China…”

April 14 – Bloomberg: “China is set to send its defense minister to Russia for the first time since President Vladimir Putin ordered the invasion of Ukraine more than a year ago, the latest sign of close ties between Moscow and Beijing. Li Shangfu… will start the visit Sunday at the invitation of counterpart Sergei Shoigu… He’ll visit Russian military institutions as part of the trip…”

De-globalization and Iron Curtain Watch:

April 14 – Dow Jones (Austin Ramzy and Samantha Pearson): “Chinese leader Xi Jinping and Brazilian President Luiz Inácio Lula da Silva struck a unified pose in defiance of U.S. foreign and trade policy in a meeting in Beijing on Friday, adding weight to Beijing’s pushback against what it sees as a Washington-led containment effort. ‘We will work to expand trade and balance world geopolitics,’ Mr. da Silva wrote… after meeting with Mr. Xi. Mr. Xi called the Brazilian leader an ‘old friend of the Chinese people’ who has ‘promoted breakthrough developments in relations between the two countries.’ Mr. da Silva spent two days traveling through China before meeting with Mr. Xi, part of an effort by the leftist Brazilian leader to deepen ties with his country’s largest trading partner following a period of relative isolation under his right-wing predecessor, Jair Bolsonaro.”

April 11 – Bloomberg: “Russia’s current-account surplus shrank last quarter by over $51 billion from a year earlier, as sanctions increasingly deprive the government of what’s been a critical source of hard currency since the invasion of Ukraine. The surplus in the current account… decreased to $18.6 billion in the first three months of the year, according to preliminary central bank data published on Tuesday. It’s the smallest surplus for any first quarter since 2016.”

April 13 – Financial Times (Joe Leahy and Hudson Lockett): “Brazil’s president Luiz Inácio Lula da Silva has called on developing countries to work towards replacing the US dollar with their own currencies in international trade, lending his voice to Beijing’s efforts to end the greenback’s dominance of global commerce. Kicking off his first state visit to China since taking office in January, Lula called for the countries of the so-called Brics group of nations — which in addition to Brazil and China includes Russia, India and South Africa — to come up with their own alternative currency for use in trade. ‘Every night I ask myself why all countries have to base their trade on the dollar,’ Lula said in an impassioned speech at the New Development Bank in Shanghai, known as the ‘Brics bank’. ‘Why can’t we do trade based on our own currencies?’ he added, drawing loud applause from the audience of Brazilian and Chinese dignitaries. ‘Who was it that decided that the dollar was the currency after the disappearance of the gold standard?’”

April 14 – Bloomberg (Simone Iglesias): “Brazil’s Luiz Inacio Lula da Silva wants to improve his country’s relationship with Beijing in order to reorient the global political order, possibly boosting Chinese plans to counter decades of US preeminence in world affairs. ‘Our interests in the relationship with China are not just commercial,’ Lula said… in Beijing… ‘We have political interests and we have interests in building a new geopolitics so that we can change world governance by giving more representation to the United Nations.’

Inflation Watch:

April 12 – Bloomberg (Reade Pickert): “A key measure of US inflation showed hints of moderating in March, but likely not by enough to dissuade the Federal Reserve from raising interest rates again next month. The core consumer price index — which excludes food and energy and is closely watched by the Fed — rose 0.4% from the prior month following a 0.5% gain… Yet key measures of housing costs posted the smallest monthly increases in about a year and grocery prices dropped… The core CPI, which economists view as the better indicator of underlying inflation, was up 5.6% from a year ago. It’s the first time in over two years that the core came in above the overall measure, which was up 5%.”

April 13 – Associated Press (Paul Wiseman): “U.S. wholesale prices fell in March, a sign that inflationary pressures in the economy are easing more than a year after the Federal Reserve began aggressively raising interest rates. Plunging energy prices pulled the government’s producer price index down 0.5% from February to March; it had been unchanged from January to February. Compared with a year ago, wholesale prices were up 2.7% in March — the mildest 12-month increase since January 2021 and down significantly from a 4.7% annual rise in February.”

April 12 – Bloomberg (Augusta Saraiva): “The costs of many US household necessities retreated in March from a month earlier in welcome news for families that have been strapped by an extended period of rapid inflation. Key measures of housing costs registered their smallest monthly advances in about a year, while prices of groceries dropped for the first time since 2020 and household energy slid by the most in almost nine years, according to government data… That, along with a drop in gasoline prices, contributed to a smaller-than-expected 0.1% monthly increase in the consumer price index.”

April 9 – Wall Street Journal (Paul Hannon): “Energy prices are falling back more than a year on from Russia’s invasion of Ukraine. But the other big cost of the war for households around the world continues to rise: food. In 12 months through March, prices of food, alcohol and tobacco were up 15.4% in the eurozone, while energy prices were down 0.9%. Food prices were up 10.2% in the U.S. in the 12 months through February, well ahead of energy at 5.2%.”

April 13 – Bloomberg (Lucia Mutikani): “Just three years ago, when OPEC+ oil giants fell out, the US found itself playing the role of peacemaker. Now it looks more like their target. The Saudi-Russia oil alliance has the potential to cause all kinds of trouble for the US economy — and even for President Joe Biden’s re-election campaign. This month’s OPEC+ decision to cut crude output, for the second time since Biden flew to Saudi Arabia last summer seeking an increase, may be just the start. That April 2 announcement has lifted oil prices by about $5 a barrel. OPEC’s own projections show that the cuts will widen the supply shortfall later this year. That means inflation will be higher, and recession risks are bigger than they otherwise would have been…”

April 10 – Reuters (David Shepardson): “The United States Postal Service (USPS) on Monday said it was seeking approval to hike the price of first-class mail stamps to 66 cents from 63 cents. USPS won approval to hike stamp prices to 63 cents from 60 cents in January. The new hike – which the USPS says is needed to offset the rise in inflation – would take effect July 9 if approved by the Postal Regulatory Commission… The plan seeks to raise overall first-class mail prices by 5.4%.”

April 12 – Bloomberg (Mumbi Gitau and Dayanne Sousa): “Sugar eased in New York, after hitting the highest in a decade on persistent worries about tight global supplies… Futures have surged lately on prospects for limited exports out of India and concerns about production in other key growers, with Wilmar International Ltd. expecting a deficit for this season.”

Biden Administration Watch:

April 14 – Bloomberg (Isabel Reynolds and Daniel Ten Kate): “The US is pressing the need for allies to coordinate against economic coercion, not just military threats, as Japan prepares to host top diplomats from the Group of Seven nations amid heightened tensions with China. ‘That coercion piece is important,’ US Ambassador to Tokyo Rahm Emanuel said… ‘It keeps the United States in the center of gravity and helps our allies and alliance and our friends to know that we are in the game.’”

Federal Reserve Watch:

April 12 – Reuters (Howard Schneider): “Several Federal Reserve policymakers last month considered pausing interest rate increases after the failure of two regional banks and a forecast from Fed staff that banking sector stress would tip the economy into recession. But even they concluded high inflation remained so paramount they pressed on with a rate hike despite the risk. After an unexpectedly complex debate that reshaped some policy views in real time, the dramatic developments after the March 10 failure of Silicon Valley Bank ultimately did little to derail the Fed’s rate-hike campaign, with officials convinced they could battle inflation with one set of tools and stabilize financial markets with others.”

April 11 – Yahoo Finance (Jennifer Schonberger): “New York Fed President John Williams said… the Federal Reserve has work to do bringing down inflation given a labor market that remains ‘quite strong.’ ‘Inflation is still very high,’ Williams told Yahoo Finance… ‘Some of this core services inflation excluding housing that hasn’t budged yet, so still … got our work cut out for us to get inflation back to 2%.’”

April 11 – Reuters (Ann Saphir): “Minneapolis Federal Reserve Bank President Neel Kashkari… said the Fed’s interest-rate hikes and a possible pullback in lending after two bank failures last month could trigger a recession, but allowing inflation to stay high would be even worse for the labor market. ‘It could be that our monetary policy actions and the tightening of credit conditions because of this banking stress leads to an economic downturn. That might even lead to a recession,’ Kashkari said…”

April 12 – Yahoo Finance (Jennifer Schonberger): “San Francisco Fed President Mary Daly said… the strength of the economy and still-high readings on inflation suggest the Federal Reserve needs to raise interest rates further, but how much more will depend on how much credit tightens as a result of recent bank failures… ‘The strength of the economy and the elevated readings on inflation suggest that there is more work to do,’ she added. ‘How much more depends on several factors, all with considerable uncertainty attached to their evolution.’”

April 11 – Reuters (Michael S. Derby): “The Federal Reserve is on a path to shrink the size of its massive stock of cash and bonds for several more years, and will likely also face several more years of negative net income as well, a report from the New York Fed said… As part of the annual report for its System Open Market Account for 2022, the bank said that Fed holdings, which now stand at $8.7 trillion, will likely fall to around $6 trillion by the middle of 2025 before holding steady for around a year. Holdings are then expected to grow to maintain balance with the growth of the economy and tick back up to $7.2 trillion by 2030.”

April 11 – Bloomberg (Jonnelle Marte and Alexandra Harris): “Higher interest rates could force the Federal Reserve to incur greater operating losses on its portfolio of assets and pause remittance payments to the US Treasury Department for ‘some time,’ undercutting a source of government revenue, according to new projections from the New York Fed. ‘This negative net income is a result of policy rate increases undertaken by the Federal Reserve in its pursuit of its congressional mandate of maximum employment and price stability,’ the New York Fed said… ‘Over time, net income would be expected to turn positive again.’”

April 9 – Wall Street Journal (Andy Kessler): “‘The Lawrence Welk Show,’ which ran from 1951 to 1982, was known for its schmaltzy ‘champagne music’ and a TV screen full of bubbles to open most shows. The interest-rate-slashing Federal Reserve has been running the bubble machine ever since. Now, with inflation feeling like it’s rolling over as the economy slows, it’s time to shut the machine down. Since the fall of 2008, with a brief respite in 2019, the real federal-funds rate has been negative, meaning interest rates have been below inflation (and still are) and the Fed has been accommodative. Accommodating what? Well, in the false hope of boosting aggregate demand and fighting deflation, they’ve accommodated bubbles, bubbles everywhere. Deflation is only a ghost, often mistaken for prices dropping naturally and to our benefit.”

U.S. Bubble Watch:

April 13 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits increased more than expected last week, further evidence that labor market conditions were easing as higher borrowing costs dampen demand in the economy… Initial claims for state unemployment benefits rose 11,000 to a seasonally adjusted 239,000 for the week ended April 8… Unadjusted claims increased 27,457 to 234,577 last week, with filings in California surging 11,388. There were also significant gains in claims in New Jersey, Pennsylvania, Texas, New York and Connecticut.”

April 11 – Bloomberg (Augusta Saraiva): “More US small businesses reported having greater difficulty getting a loan in March after multiple bank failures led to a further tightening of credit conditions. A net 9% of owners who borrow frequently said financing was harder to get compared to three months earlier, the most since December 2012, according to a survey from the National Federation of Independent Business… The same share expects tougher credit conditions in the next three months, matching the highest level in a decade. ‘Small-business owners are cynical about future economic conditions,’ Bill Dunkelberg, NFIB chief economist, said… ‘There are major uncertainties ahead, most immediate is concern that a banking crisis could develop.’”

April 11 – Associated Press (Mae Anderson and Anne D’Innocenzio): “According to the latest Biz2Credit Small Business Lending Index released in February, the approval rates of small business loan requests at big banks have fallen for nine consecutive months. The larger banks approved just 14.2% of applications in February, down from 28.3% in February 2020. Small banks granted about 20% of loan applications this February, but they were approving about half of all requests back in early 2020, before the pandemic hit.”

April 12 – Bloomberg (Augusta Saraiva): “Spending on credit and debit cards rose at the smallest pace in more than two years…, according to a report by Bank of America Institute. After a strong start of the year, spending per household rose 0.1% from a year ago, the slowest pace since February 2021… The weakness was broad-based across goods and services. Based on BofA internal data, households that make more than $125,000 a year saw a drop in annual after-tax wages for the first time since May 2020.”

April 14 – Reuters (Lucia Mutikani): “U.S. retail sales fell more than expected in March as consumers cut back on purchases of motor vehicles and other big ticket items, suggesting that the economy was losing steam at the end of the first quarter because of higher interest rates. Retail sales dropped 1.0% last month… Excluding automobiles, gasoline, building materials and food services, retail sales slipped 0.3% last month.”

April 11 – CNBC (Stephanie Dhue and Sharon Epperson): “Inflation, economic instability and a lack of savings have an increasing number of Americans feeling financially stressed. Some 70% of Americans admit to being stressed about their personal finances these days and a majority — 52% — of U.S. adults said their financial stress has increased since before the Covid-19 pandemic began in March 2020, according to a new CNBC Your Money Financial Confidence Survey…”

April 10 – Reuters (Michael S. Derby): “Americans said last month that access to credit was at its toughest level in nearly a decade, as they also braced for higher levels of inflation over the next few years, a report from the New York Fed said… In the March Survey of Consumer Expectations, the bank found that the share of households who said credit is harder to get versus a year ago rose to the highest level in a survey that dates back to 2014. The bank’s report also said, ‘respondents were more pessimistic about future credit availability as well, with the share of households expecting it will be harder to obtain credit a year from now also rising.’”

April 10 – Financial Times (Jaren Kerr): “Corporate America is facing its sharpest drop in profits since the early stages of the coronavirus pandemic, according to Wall Street forecasts, as high inflation squeezes margins and fears of an impending recession hold back demand. Companies on the S&P 500 index are expected to report a 6.8% decline in first-quarter earnings compared with the same period a year earlier, according to analyst estimates compiled by FactSet. That would be the biggest fall since the more than 30% plunge in the second quarter of 2020, which came as the rapid spread of Covid-19 led to a widespread economic shutdown.”

April 10 – Wall Street Journal (Bob Tita): “The construction industry has become a pillar of strength in the U.S. economy, helping contractors offset rising expenses as they deal with labor shortages. A building boom in industrial plants, infrastructure and other nonresidential projects is offsetting home construction in the U.S. that has been weakening under the weight of higher interest rates. Contractors said spending on nonresidential projects has stayed strong as borrowing costs rise… Spending on nonresidential construction for February, the most recent month available, totaled $982 billion, nearly 17% higher than a year earlier and steady with January…”

April 8 – Wall Street Journal (Ben Eisen and Gina Heeb): “Cars are staying on the road longer, reaching an age where they need substantial repairs or break down. It is a key reason more people are falling behind on their auto loans. The trend, noted by lenders, consumer attorneys and others, is another example of the long-lasting effects of the pandemic… Some lenders are getting spooked, tightening their standards so that drivers who want to buy older vehicles have fewer options for getting financing. Americans who already were discouraged by the rapid increase in car prices over the past few years could have an even harder time finding a car they can afford, or one that won’t guzzle up their savings after they buy it.”

China Watch:

April 13 – Reuters (Joe Cash and Ellen Zhang): “China’s exports unexpectedly surged in March, with officials flagging rising demand for electric vehicles, but analysts cautioned the improvement partly reflects suppliers catching up with unfulfilled orders after last year’s COVID-19 disruptions. Exports in March shot up 14.8% from a year ago, snapping five straight months of declines and stunning economists who predicted a 7.0% fall… Imports dropped just 1.4%, smaller than the 5.0% decline forecast and a 10.2% contraction in the previous two months.”

April 10 – Bloomberg (Tom Hancock): “Chinese provinces plan to boost spending on major construction projects by almost a fifth this year as Beijing continues to rely on infrastructure to spur an economy being hindered by consumers still bruised from years of pandemic restrictions. About two thirds of China’s regions have announced spending plans for major projects such as transport infrastructure, energy generation and industrial parks this year, adding up to more than 12.2 trillion yuan ($1.8 trillion)… That’s an increase of 17% compared to last year… The analysis shows spending is being directed toward fields like hi-tech manufacturing and energy, underlining Beijing’s focus on technological self-sufficiency and energy security in the face of growing competition and political tension with the US.”

April 11 – Reuters (Liangping Gao and Ryan Woo): “China’s consumer inflation hit an 18-month low and factory-gate price declines sped up in March as demand stayed persistently weak, shoring up the case for policymakers to take more steps to support the uneven economic recovery… The consumer price index (CPI) rose 0.7% year-on-year, the slowest pace since September 2021 and weaker than the 1.0% gain in February… The producer price index (PPI) fell 2.5% year-on-year, the fastest pace since June 2020 and compared with a 1.4% drop in February. The PPI has fallen for six straight months.”

April 9 – Financial Times (Edward White and Cheng Leng): “China’s financial sector is reeling from a series of new corruption probes and a surge in surprise audits of venture funds, as President Xi Jinping sharpens his focus on an industry he sees as failing to serve the broader economy. With Beijing’s graft-busting Central Commission for Discipline Inspection warning against ‘hedonism’ and ‘high-end lifestyles’, banks have also been making deep cuts to executive pay and bonuses as former high-ranking officials come under investigation. Since February, more than a dozen executives have been investigated or penalised as the CCDI began a fresh drive to ‘resolutely’ fight misconduct in the sector and eradicate executives’ ‘wrongful pursuit’ of becoming financial elites, as it put it.”

April 14 – Bloomberg (Dorothy Ma): “Some of China Huarong’s dollar bonds had the biggest drop in over five months Friday afternoon, after Moody’s downgraded the firm’s rating to just one notch above junk. Huarong’s 3.625% bond due 2030 dropped 2.9 cents to 66.6 cents, the biggest decline since October…”

Central Banker Watch:

April 12 – Bloomberg (Marton Eder): “Stubbornly high inflation still warrants another 50 bps increase in interest rates at the European Central Bank’s May meeting, Governing Council member Robert Holzmann told Boersen Zeitung newspaper… ‘The danger of currently doing too little and to fan inflation is bigger than the risk of doing too much.’ On quantitative tightening: ‘If the current pace of €15 billion ($16.5bn) a month doesn’t trigger any problems on the markets for private or public securities, in my opinion there’s a lot that would support increasing the tempo from July.”

April 12 – Reuters (David Ljunggren): “Interest rates in Canada may have to stay restrictive for longer to ensure inflation declines to the Bank of Canada’s 2% target, Governor Tiff Macklem said… Macklem, speaking after the bank announced that it was holding its key rate at 4.50%, said the central bank’s governing council had discussed whether rates had been raised enough. Macklem said that while the bank was encouraged inflation was dropping, the job of monetary policy was not done.”

Bursting Global Bubble Watch:

April 11 – Associated Press (Paul Wiseman and Fatima Hussein): “The outlook for the world economy this year has dimmed in the face of chronically high inflation, rising interest rates and uncertainties resulting from the collapse of two big American banks. That’s the view of the International Monetary Fund, which… downgraded its outlook for global economic growth. The IMF now envisions growth this year of 2.8%, down from 3.4% in 2022 and from the 2.9% estimate for 2023 it made… in January. The fund said the possibility of a ‘hard landing,’ in which rising interest rates weaken growth so much as to cause a recession, has ‘risen sharply,’ especially in the world’s wealthiest countries. Those conditions are also increasing the risks to global financial stability, the fund warned.”

April 11 – Reuters (Hannah Lang): “The International Monetary Fund warned… of a ‘perilous combination of vulnerabilities’ in financial markets, saying participants’ failing to adequately prepare for interest rate increases has led to significant uncertainty about the health of the financial system. Moreover, the global lender said U.S. regional banks in particular may warrant closer scrutiny after the largest bank collapses since the 2007-2009 financial crisis four weeks ago exposed weaknesses in a sector responsible for a sizeable share of consumer and business credit in the world’s largest economy.”

April 13 – Bloomberg (Sankalp Phartiyal): “Infosys Ltd. forecast sales that lagged estimates and warned customers in key sectors like finance are pulling back, a sign of how far corporations are tightening their budgets to weather an economic slowdown.”

April 11 – Wall Street Journal (Rebecca Feng): “The full write-down of Credit Suisse Group AG’s riskiest bonds as part of its takeover by UBS Group AG has left some wealthy Asian investors sitting on big losses. More than $17 billion of so-called Additional Tier 1 securities issued by Credit Suisse became virtually worthless last month… Asian high-net-worth investors—including clients of Credit Suisse’s own private bank—were among the holders of these bonds. The AT1 bonds were attractive to many wealthy individuals because the securities offered high returns and were issued by well-known institutions, including some of the world’s largest banks.”

Europe Watch:

April 11 – Reuters (Sachin Ravikumar): “Junior doctors in Britain began a four-day strike over pay on Tuesday that is likely to cause unprecedented disruption to the state-funded National Health Service (NHS), prompting the government to warn of a risk to patient safety. Tens of thousands of junior doctors — qualified physicians who make up nearly half of the medical workforce — are striking for pay rises better aligned with inflation, in a walkout that follows a three-day doctors’ strike last month.”

Japan Watch:

April 10 – Bloomberg (Toru Fujioka, Sumio Ito and Yoshiaki Nohara): “The Bank of Japan’s yield curve control and negative interest rates are appropriate amid the current economy, new Governor Kazuo Ueda said, signaling any significant changes to its monetary policy framework may be unlikely for the time being. Speaking at his inaugural news conference as governor, Ueda also said he’s open to the idea of a policy review from a longer-term standpoint, although he’d like to discuss it with other board members before any decision. ‘Given the current economic, price and financial conditions, I think it’s appropriate to keep up the current yield curve control,’ he said.”

April 12 – Bloomberg (Toru Fujioka): “New Bank of Japan Governor Kazuo Ueda struck a dovish tone once again by highlighting the risk of inflation slowing below the central bank’s target. Comparing the risk of inflation overshooting and falling below 2%, “it’s appropriate to conduct monetary policy by focusing on the latter risk” considering economic conditions, Ueda told reporters… Coming three days after Ueda took the BOJ’s top position, his comments are likely to further boost speculation that the new governor won’t rush toward normalization, as his first policy meeting on April 27-28 approaches.”

EM Crisis Watch:

April 10 – Financial Times (Jonathan Wheatley): “Low-income countries will face their biggest bills for servicing foreign debts in a quarter of a century this year, putting spending on health and education at risk. Repayments on public debt owed to non-residents for a group of 91 of the world’s poorest countries will take up an average of more than 16% of government revenues in 2023, rising to almost 17% next year, according to a study by debt campaign group Debt Justice… The figures — the highest since 1998 — follow a steep rise in global borrowing costs last year, when central banks sought to counter high inflation with rapid rate rises.”

April 14 – Reuters (Horacio Soria and Juan Carlos Bustamante): “Argentines, painfully accustomed to decades of spiraling prices, say that the current 102.5%-and-climbing inflation rate is on another level and is making it almost impossible to get by. ‘In my case, I have zero capacity to save,’ said Claudia Hernansaez, a publishing company employee. ‘I try to think that someday we’re going to be better off. But the inflation we’re living with today in Argentina is terrible. It feels like never before.’”

Social, Political, Environmental, Cybersecurity Instability Watch:

April 12 – Reuters (Ben Blanchard): “A Chinese woman has become the first person to die from a type of bird flu that is rare in humans, the World Health Organisation (WHO) said, but the strain does not appear to spread between people.”

Geopolitical Watch:

April 14 – Bloomberg (Jenny Leonard and Debby Wu): “Taiwan is working with friendly nations on how to respond to a possible economic blockade by China, a scenario that appears more likely than a direct military attack on the island, according to a senior Taiwanese diplomat. Chinese military exercises are increasingly aimed at ‘winning the war without an actual fight,’ Taiwan’s deputy Foreign Minister Roy Chun Lee said… ‘An economic blockade is, for sure, one of the possible options that China is seriously looking at.’”

April 11 – Washington Post (Christian Shepherd and Vic Chiang): “China’s newest aircraft carrier has for the first time practiced attacking Taiwan from the island’s east coast, demonstrating Beijing’s growing determination to project power beyond the Taiwan Strait and far into the Pacific Ocean… Chinese saber-rattling in the Taiwan Strait, which is just 80 miles wide at its narrowest point, has become commonplace as the Communist Party under Xi Jinping becomes increasingly vehement about its intent to take control of the self-governed democracy. But the three days of military exercises around Taiwan that concluded on Monday marked a change: They focused on dominating the air and sea in the western Pacific by simulating a carrier-based strike from the far side of the island, rather than the usual approach from the Taiwan Strait that separates the island from China.”

April 11 – Reuters (Yimou Lee and Ben Blanchard): “The Chinese navy continued with ‘actual combat training’ around Taiwan on Tuesday, state media said, a day after Beijing announced the end of drills and as Taiwan President Tsai Ing-wen criticised China for its ‘irresponsible’ behaviour… Although China said on Monday night the drills had ended, state television said that several warships ‘continued to carry out actual combat training in the waters around Taiwan to test the organisational and command capabilities of commanders at all levels and the combat effectiveness of weapons and equipment’.”

April 12 – Reuters (Dominique Patton): “Comments by French President Emmanuel Macron on Taiwan are puzzling, a senior Taiwanese politician said, wondering whether France’s founding ideals of liberty, equality and fraternity are now out of fashion. Macron, in comments in an interview on a trip to China that was meant to showcase European unity on China policy, cautioned against being drawn into a crisis over Taiwan driven by an ‘American rhythm and a Chinese overreaction’.”

April 12 – Reuters (David Lawder): “French finance minister Bruno Le Maire said… France and Europe want to pursue an independent policy path from the United States and China, but intend to be ‘strong and reliable allies of the United States of America.’ Le Maire told reporters on the sidelines of the International Monetary Fund and World Bank Spring Meetings that there was strong coordination between Paris and Washington on their positions on China ahead of President Emmanuel Macron’s recent visit to the country.”

April 14 – Financial Times (Joe Leahy and Guy Chazan): “Germany’s foreign minister has warned China not to use military force against Taiwan, striking a different tone from French president Emmanuel Macron… Annalena Baerbock said after a meeting in Beijing with China’s foreign minister Qin Gang… that conflicts must be solved peacefully and that Berlin was ‘concerned’ about the situation in Taiwan. ‘A military escalation in the Taiwan Strait, which 50% of world trade flows through daily, would be a horror scenario for the whole world,’ said Baerbock… ‘Conflicts can only be solved peacefully… A unilateral, to say nothing of a violent, change of the status quo would be unacceptable to us as Europeans.’”

April 13 – Reuters (Hyunsu Yim, Ju-min Park, Soo-hyang Choi, Hyonhee Shin and Chang-Ran Kim): “North Korea fired a new model of long-range ballistic missile on Thursday, South Korea said, triggering a scare in northern Japan where residents were told to take cover, though there turned out to be no danger. A South Korean military official said the missile appeared to have been a new weapon displayed at recent North Korean military parades, and possibly used solid fuel.”

April 8 – Reuters (Heekyong Yang and Ju-min Park): “North Korea has conducted another test of a nuclear-capable underwater attack drone…, the latest demonstration of its military capabilities as it faces off against the United States and South Korea. North Korea tested a nuclear-capable unmanned underwater attack weapon called ‘Haeil-2’ from April 4 to April 7…, more than a week after it disclosed a new underwater drone called ‘Haeil-1’, which translates as tsunami.”

April 8 – Associated Press: “The U.S. Navy has deployed a guided-missile submarine capable of carrying up to 154 Tomahawk missiles to the Middle East, a spokesman said…, in what appeared to be a show of force toward Iran following recent tensions.”

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