MARKET NEWS / CREDIT BUBBLE WEEKLY

April 28, 2023: Animal or Lab?

MARKET NEWS / CREDIT BUBBLE WEEKLY
April 28, 2023: Animal or Lab?
Doug Noland Posted on April 29, 2023

For years, we’ve been told the banking system is sound and highly-capitalized – that lessons were learned from the 2008 crisis. Importantly, the Fed would lean on “macro-prudential” measures (i.e., regulation) to safeguard financial stability, while employing aggressively loose monetary policy to bolster the economy.

Our system last month suffered two of the three largest bank failures in U.S. history. This year’s first four months could see three of the top four – with First Republic soon to supplant SVB for the number two slot. Meanwhile, the Fed on Friday released their “Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank.” The fourth sentence sounds familiar: “Our banking system is sound and resilient, with strong capital and liquidity.” The first three not so much:

“Silicon Valley Bank (SVB) failed because of a textbook case of mismanagement by the bank. Its senior leadership failed to manage basic interest rate and liquidity risk. Its board of directors failed to oversee senior leadership and hold them accountable. And Federal Reserve supervisors failed to take forceful enough action…”

There is nothing “textbook” about either SVB or the macro backdrop. Let’s be clear: SVB had its share of idiosyncratic risk. But this is a systemic issue. Three major bank failures in seven weeks would speak for itself.

Federal Reserve comments and conventional thinking notwithstanding, the overarching issue in 2008 was not insufficient bank capital. Total mortgage debt had almost doubled (96%) in six years, with – as one should expect – loan quality deteriorating and speculative leverage ballooning over the course of the boom. In response to the bursting “tech” Bubble and severe corporate debt issues, rates were cut to 1.25% in 2002. The rate collapse fueled double-digit mortgage debt growth in 2002 – and for the next four years.

Not surprisingly, the role monetary policy played in fomenting the current crisis goes unmentioned in the Fed’s SVB report. No mention of the impact from years of near zero interest rates – or the historic $5 TN increase in the Fed’s balance sheet. Not a word of the banking system’s unprecedented $5.54 TN, or 27.6%, three-year growth. Nothing on the corresponding $5.16 TN, or 33.2%, surge in Bank Deposits.

The closest the report gets to key issues is within the “External Federal Reserve Risk Perspective” section:

“The Federal Reserve Board of Governors publishes a semiannual Supervision and Regulation Report each May and November to inform the public and provide transparency about its supervisory and regulatory policies and actions, as well as current banking conditions. The May 2022 report assessed banking system conditions as strong… Capital and liquidity were assessed as strong and ample… The November 2022 report assessed the financial condition of banks as generally sound. Expanding net interest margins were noted as a positive factor as interest rates rose, balanced by declining values of investment securities and the potential for rising credit risk associated with floating rate loans…”

“This review of the Federal Reserve surveillance and analysis shows a broad-based approach that considers a wide range of traditional risks across portfolios. Overall, this analysis appears largely fit for purpose and consistent with the mandate of the Federal Reserve, with a strong appreciation of how macroeconomic and financial topics can impact traditional banking risks. The issues most relevant to the failure of SVBFG—rising interest rates, impact on securities valuation, and liquidity pressure—were identified, analyzed, and escalated. The reviews did not consider the potential for extreme tail events like a rapid outflow of deposits or the systemic implications of broad runs on uninsured deposits.”

Others would disagree, but I’ve yet to witness “extreme tail events.” If a bank triples assets in three years, funded chiefly by an almost tripling of deposits, there’s nothing extreme about this institution running into serious issues. Similar to 2008, the “extremes” presaged the crisis. There was a single overarching “extreme tail event”: monetary policy.

“SVBFG showed foundational weaknesses in its liquidity risk management.” “SVBFG failed to assess and manage the interest rate risk (IRR) in its rapidly growing securities portfolio.” “SVBFG management was focused on the short-run impact on profits… In sum, when rising interest rates threatened profits and reduced the value of its securities, SVBFG management took steps to maintain short-term profits rather than effectively manage the underlying balance sheet risks.”

SVB management and board of directors were extraordinarily poor risk managers. The same can be said for Signature Bank, First Republic, and many others. Was it from Animal (spirits) or a Lab? What was the source of the current pandemic of afflicted risk management disease?

The Fed’s SVB report is another largely wasted effort. I’m not expecting much better from any possible “independent” reviews. Clearly, regulation was pathetic. Politics played a predictable role in loosening the regulatory environment. But the Risk Oblivious Pandemic originated in the Federal Reserve’s lab – our central bank’s historic multi-decade experiment in activist inflationism.

Why would SVB management focus so keenly on their compensation, rather than effectively managing risk? Well, SVB’s stock price was around $200 when the Fed restarted QE in late-summer 2019. It was above $700 by October 2021. The incentive structure had become grossly distorted. And surely management was confident that the Fed would resolve any macro risk. Of course, they would cut rates and employ QE when necessary. Never would they raise rates to the point of risking acute systemic stress. Make hay while the sun shines.

But this key moral hazard issue is not limited to happenings within the Marriner S. Eccles Federal Reserve Board Building. SVB’s management and board knew it always enjoyed easy access to the Federal Home Loan Bank’s (FHLB) liquidity backstop. Why worry about your asset/liability mismatch and uninsured deposits when the FHLB will gladly wire your institution as much money as you think you might ever need (no questions asked and, better yet, no Fed discount window stigma)?

FHLB Q1 data was released this week. Total Assets surged an unprecedented $317 billion, or 102% annualized, to a record $1.564 TN. This places one-year growth at a staggering $802 billion, or 105%.

The FHLB has been around since the Great Depression. Most of its assets are loans, or “advances,” to member institutions. Advances surged a record $225 billion during the first quarter. Moreover, the past year saw four of the six largest quarterly increases in “advances.” The $165 billion Q1 2020 pandemic response was previously second to the subprime eruption Q3 2007’s $180 billion.

I am compelled to again draw attention to the close link between the FHLB and the money markets. Money Fund Assets surged $500 billion during Q1, or better than 40% annualized. The money funds are a key source of liquidity that the FHLB uses to finance “advances” to member institutions. Especially for the problem banks (i.e., SVB and First Republic), FHLB advances provide bank liquidity to fund deposit flight, deposit liquidity flowing briskly into money funds – where this liquidity is available to be borrowed again (and again) by the FHLB.

April 22 – Bloomberg (James Crombie): “Add central banks to the wall of worry for global credit markets. This year’s rally in risk assets is more to do with a $1 trillion central bank liquidity injection than any improvement in the economic outlook, according to Citigroup Inc.. That massive tailwind… may soon become a huge drag as policymakers get back to quashing inflation, having extinguished the banking-sector fire. ‘With peak liquidity past, we would not be at all surprised if markets were now to experience a sudden pressure loss,’ Matt King, Citi’s global markets strategist, wrote… ‘Keep watching the liquidity data — and buckle up.’”

April 26 – Bloomberg (Alexandra Harris): “Issuance from the Federal Home Loan Banks climbed as concerns about First Republic spurred member institutions to tap the system to shore up funding. FHLBs issued $33.3 billion of overnight and term discount notes Wednesday, in addition to another $9.266 billion in floating-rate notes… It also issued about $11 billion of discount notes via auction on April 25…”

Understandably, the stock market now sees bank instability as ensuring oodles of additional Fed and FHLB liquidity. First Republic’s stock sank 75% this week. Buy big tech stocks.

April 26 – Axios (Felix Salmon): “If First Republic Bank fails…. then the U.S. government is going to reward select financial institutions with billions of dollars’ worth of gains. Why it matters: Bank rescues are often seen as government bailouts, while bank failures are seen as being more punitive. In reality, however, the government invariably ends up being extremely generous to the banking sector whenever there’s a failure… It’s not just First Republic’s eventual acquirer who stands to make billions from the deal. A consortium of 11 banks has $30 billion on deposit at First Republic — all of which is uninsured by the FDIC. That money is theoretically at risk if First Republic fails. Realistically, the government will declare a systemic risk exception and insure all those $30 billion in deposits. Those billions will flow from the government — in the form of the FDIC — to America’s biggest banks: JPMorgan, Bank of America, Wells Fargo and Citigroup ($5bn each); Goldman Sachs and Morgan Stanley ($2.5bn each); and a group of regional banks, including Truist and PNC, getting $1 billion each.”

A First Republic failure could get messy. First of all, the $30 billion of “time deposits” provided by the 11 major banks is uninsured – so “theoretically at risk” is not how I would phrase it. And enormous borrowings from the Fed and FHLB funded a staggering $100 billion of Q1 deposit flight. The “good” news is that FRC’s uninsured depositors were surreptitiously bailed out. The bad news is First Republic ended the quarter on the hook to the Fed ($77bn) and the FHLB ($28bn) for a whopping $105 billion (approaching half total assets of $232bn). Why shouldn’t the big banks get in line with the remaining uninsured depositors and other creditors?

While ebullient stocks envision liquidity excess as far as the eye can see, bank CDS prices were not as complacent. Bank of America CDS rose seven this week to 107 bps (from 72 bps on March 8th), and Citigroup CDS gained seven to 96 bps (77bps). JPMorgan CDS rose four to 81 bps (69bps) and Wells Fargo four to 108 bps (66bps). The Treasury market’s view of the world seemed more aligned with bank CDS than equities. Two-year Treasury yields sank 18 bps to 4.01%, with five-year yields down 18 bps to a one-month low of 3.48%. And market pricing for the policy rate at the Fed’s December 13th meeting dropped 10 bps to 4.47%.

April 28 – Reuters (Greg Roumeliotis): “The U.S. Federal Deposit Insurance Corporation (FDIC) is preparing to place First Republic Bank (FRC.N) under receivership imminently, a person familiar with the matter said on Friday, sending shares of the lender down nearly 50% in extended trading. The U.S. banking regulator decided the troubled regional lender’s position has deteriorated and there is no more time to pursue a rescue through the private sector, the source told Reuters, requesting anonymity because the matter is confidential.”

April 28 – Wall Street Journal (Andrew Ackerman, David Benoit and Rachel Louise Ensign): “Big banks including JPMorgan… and PNC Financial Services Group Inc. are vying to buy First Republic Bank FRC in a deal that would follow a government seizure of the troubled lender, according to people familiar with the matter. A seizure and sale of First Republic by the Federal Deposit Insurance Corp. could come as soon as this weekend, the people said.”

It’s worth stating again: Major bank failures with unemployment at multi-decade lows, positive GDP, and buoyant securities markets are a harbinger of trouble ahead. I’ll assume a First Republic failure spurs more uninsured deposit flight from banks big and small. The plight of First Republic’s uninsured depositors – including the big banks – will be intriguing. With First Republic’s depositors tending to be upper income, a bailout comes with political risk. And as the stock market dismisses First Republic’s predicament – and with $100 billion of deposits having already exited – the case for arguing systemic risk implications is weak.

It’s worth noting that Q1’s GDP Price Index was reported at a stronger-than-expected 4.0% annualized, with Core PCE (personal consumption expenditures) gaining a stronger-than-expected 4.9%. The Employment Cost Index rose a stronger-than-expected 1.2% during Q1, or 4.8% y-o-y. The March PCE Deflater increased a stronger-than-expected 4.2% y-o-y. And the University of Michigan survey of one-year inflation expectations was unchanged from earlier in the month at 4.6%.

The Fed and FHLB’s huge liquidity injections come at a time of already loosened market financial conditions. The Federal Reserve has its hand full: an unfolding banking crisis and a slowing economy; now deeply rooted inflation; and dangerous market speculative Bubbles.

For the Week:

The S&P500 gained 0.9% (up 8.6% y-t-d), and the Dow rose 0.9% (up 2.9%). The Utilities fell 1.2% (down 3.0%). The Banks dropped 2.0% (down 19.4%), and the Broker/Dealers lost 2.1% (up 0.7%). The Transports sank 2.7% (up 4.7%). The S&P 400 Midcaps slipped 0.3% (up 2.5%), and the small cap Russell 2000 declined 1.3% (up 0.4%). The Nasdaq100 advanced 1.9% (up 21.1%). The Semiconductors dipped 0.9% (up 18.3%). The Biotechs fell 2.7% (down 0.4%). With bullion increasing $7, the HUI gold equities index added 0.2% (up 13.4%).

Three-month Treasury bill rates ended the week at 4.9025%. Two-year government yields dropped 18 bps this week to 4.01% (down 42bps y-t-d). Five-year T-note yields sank 18 bps to 3.48% (down 52bps). Ten-year Treasury yields fell 15 bps to 3.42% (down 46bps). Long bond yield declined 10 bps to 3.68% (down 29bps). Benchmark Fannie Mae MBS yields dropped 11 bps to 5.15% (down 24bps).

Greek 10-year yields fell 13 bps to 4.16% (down 41bps y-o-y). Italian yields sank 18 bps to 4.18% (down 52bps). Spain’s 10-year yields dropped 16 bps to 3.36% (down 16bps). German bund yields fell 17 bps to 2.31% (down 13bps). French yields dropped 16 bps to 2.89% (down 9bps). The French to German 10-year bond spread widened about one to 58 bps. U.K. 10-year gilt yields declined four bps to 3.72% (up 5bps). U.K.’s FTSE equities index dipped 0.6% (up 5.6% y-t-d).

Japan’s Nikkei Equities Index gained 1.0% (up 10.6% y-t-d). Japanese 10-year “JGB” yields dropped eight bps to 0.39% (down 3bps y-t-d). France’s CAC40 declined 1.1% (up 15.7%). The German DAX equities index added 0.3% (up 14.4%). Spain’s IBEX 35 equities index fell 1.9% (up 12.3%). Italy’s FTSE MIB index dropped 2.4% (up 14.2%). EM equities were mixed. Brazil’s Bovespa index was little changed (down 4.8%), while Mexico’s Bolsa index rose 1.7% (up 13.7%). South Korea’s Kospi index lost 1.7% (up 11.9%). India’s Sensex equities index rallied 2.4% (up 0.4%). China’s Shanghai Exchange Index increased 0.7% (up 7.6%). Turkey’s Borsa Istanbul National 100 index sank 7.9% (down 16.2%). Russia’s MICEX equities index slipped 0.2% (up 22.3%).

Investment-grade bond funds posted outflows of $1.318 billion, while junk bond funds reported positive flows of $594 million (from Lipper).

Federal Reserve Credit declined $32.4bn last week to $8.539 TN. Fed Credit was down $362bn from the June 22nd peak. Over the past 189 weeks, Fed Credit expanded $4.812 TN, or 129%. Fed Credit inflated $5.760 Trillion, or 205%, over the past 546 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt jumped $33.1bn last week to $3.371 TN. “Custody holdings” were down $91bn, or 2.6%, y-o-y.

Total money market fund assets surged $53.8bn to $5.263 TN, with a seven-week gain of $369 billion. Total money funds were up $753bn, or 16.7%, y-o-y.

Total Commercial Paper fell $13.1bn to $1.148 TN. CP was up $43.8bn, or 4.0%, over the past year.

Freddie Mac 30-year fixed mortgage rates declined five bps to 6.34% (up 124bps y-o-y). Fifteen-year rates added a basis point to 5.73% (up 133bps). Five-year hybrid ARM rates fell six bps to 5.77% (up 199bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up a basis point to 6.94% (up 156bps).

Currency Watch:

April 23 – Financial Times (Ruchir Sharma): “Today commentators overwhelmingly agree that a weakening US dollar cannot possibly lose its status as the world’s dominant currency because there is ‘no alternative’ on the visible horizon. Perhaps, but don’t tell that to the many countries racing to find an alternative… The prime example right now is gold, up 20% in six months. Surging demand is not led by the usual suspects — investors large and small, seeking a hedge against inflation and low real interest rates. Instead, the heavy buyers are central banks, which are sharply reducing their dollar holdings and seeking a safe alternative. Central banks are buying more tons of gold now than at any time since data begins in 1950 and currently account for a record 33% of monthly global demand for gold.”

April 26 – Reuters (Jindong Zhang, Winni Zhou and Tom Westbrook): “The yuan became the most widely-used currency for cross-border transactions in China in March, overtaking the dollar for the first time…, reflecting efforts by Beijing to internationalise use of the yuan. Cross-border payments and receipts in yuan rose to a record $549.9 billion in March from $434.5 billion a month earlier… The yuan was used in 48.4% of all cross-border transactions, Reuters calculated, while the dollar’s share declined to 46.7% from 48.6% a month earlier.”

April 27 – Reuters (Tom Westbrook): “China’s yuan currency is slowly but surely being adopted for more international payments, which analysts say could lay foundations for a trade system running parallel to the dominant U.S. dollar. In the past day alone, data showed that more cross-border transactions with China were settled in yuan in March than in dollars for the first time, and that Argentina said it aims to regularly pay for Chinese goods in yuan and not dollars… ‘The world’s largest commodity exporters and importers – China, Russia and Brazil – are now working together on using renminbi for cross-border payments,’ said Chi Lo, senior investment strategist at BNP Paribas…”

April 28 – Bloomberg (Chester Yung): “Hong Kong is burning through a closely-watched component of its monetary base to ward off attacks on its dollar to little avail, with the lack of reaction in money markets likely to keep the pressure on the beleaguered currency. The city’s aggregate balance — a gauge of interbank liquidity — has halved this year without driving local borrowing costs higher, the traditional mechanism for reversing weakness in the Hong Kong dollar.”

For the week, the U.S. Dollar Index slipped 0.2% to 101.66 (down 1.8% y-t-d). For the week on the upside, the Brazilian dollar increased 1.2%, the British pound 1.1%, the New Zealand dollar 0.7%, the Swedish krona 0.3%, and the euro 0.3%. On the downside, the Japanese yen declined 1.6%, the Australian dollar 1.2%, the South African rand 1.0%, the South Korean won 0.8%, the Norwegian krone 0.6%, the Swiss franc 0.3%, the Canadian dollar 0.1%, and the Mexican peso 0.1%. The Chinese (onshore) renminbi declined 0.31% versus the dollar (down 0.20%).

Commodities Watch:

April 22 – Financial Times (Daria Mosolova): “Central bankers who manage trillions in foreign exchange reserves are loading up on gold as geopolitical tensions including the war in Ukraine force them to rethink their investment strategies. An annual poll of 83 central banks, which manage a combined $7tn in foreign exchange assets, found that more than two-thirds of respondents thought their peers would increase their gold holdings in 2023. Bullion tends to become more attractive in times of instability, and demand has soared over the past year. The amount of gold bought by central banks rose by 152% year on year in 2022 to 1,136 tonnes, according to the World Gold Council…”

April 27 – Bloomberg: “After a bullish start to 2023, iron ore is struggling with the reality that China’s property sector — the steelmaking material’s largest demand driver for two decades — is still far from a robust recovery. Iron ore dipped below $100 a ton this week for the first time since early December, becoming the biggest victim of a bearish mood across industrial metals. The main culprit is a weaker-than-expected peak construction season…”

April 28 – Bloomberg (Hallie Gu): “Extreme weather in China is threatening to disrupt more commodities, even niche ones like rubber and peanut crops, which may push the world’s biggest consumer to import more. Rubber-tree tapping in Yunnan province, the country’s top grower, has been delayed by severe drought and powdery mildew disease, which can halve production in the worst cases.”

The Bloomberg Commodities Index declined 1.2% (down 7.5% y-t-d). Spot Gold added 0.3% to $1,990 (up 9.1%). Silver was little changed at $25.05 (up 4.6%). WTI crude fell $1.09, or 1.4%, to $76.78 (down 4%). Gasoline declined 0.9% (up 5%), while Natural Gas surged 7.9% to $2.41 (down 46%). Copper dropped 2.4% (up 2%). Wheat sank 5.8% (down 20%), and Corn slumped 4.9% (down 14%). Bitcoin rallied $2,240, or 8.3%, this week to $29,413 (up 77%).

Global Bank Crisis Watch:

April 25 – Bloomberg (Austin Weinstein and Katanga Johnson): “Months before Silicon Valley Bank and Signature Bank collapsed, US financial regulators received warnings about how the industry’s mounting unrealized losses had the potential to spark a crisis. In letters and calls from October through December, trade groups and lawmakers told senior agency officials that the losses undermined banks’ liquidity access and might hurt the economy. The losses and the letters were public, but the issue wasn’t treated as a top priority or a harbinger of what transpired in March, according to four people involved…”

April 22 – Wall Street Journal (Ben Eisen): “Moody’s… downgraded 11 regional lenders Friday, suggesting higher interest rates and recent bank failures have ushered in greater instability. The downgrades hit lenders including U.S. Bancorp, with some $682 billion in assets, Zions Bancorp, with $89 billion, and Bank of Hawaii Corp., with $24 billion. Western Alliance Bancorp, one of the banks hardest hit by regional banking turmoil, received a two-notch downgrade. First Republic Bank, which faced a run last month, had its preferred-stock rating cut.”

April 22 – Financial Times: “US banks are becoming increasingly worried about falling commercial property valuations and the risk they pose to lenders’ balance sheets, senior executives said… Office valuations in particular have been pummelled by rising interest rates and many employees’ preference for working from home since the coronavirus pandemic. However, financial executives sought to reassure investors that they did not foresee significant systemic risk because holdings are broadly distributed among banks and other institutions. ‘What happens with commercial real estate, particularly offices’ was State Street’s biggest concern, the US custody bank’s chief executive Ron O’Hanley said… Not all properties had been hit equally, he added: ‘Class A is holding up. Rents may be declining but they are not in trouble. Class B and C absolutely are.’”

April 26 – Reuters (Chiara Elisei): “Bank stress will likely be limited to a small number of banks but lead to tighter lending conditions and a pick-up in corporate defaults, a Bank of America April credit investor survey… The gap between high-yield bonds and government debt has tightened on 63% of days so far in 2023, an all-time record, signalling that credit markets are faring well in face of recent market turmoil, BofA said. The biggest share of respondents to its latest survey, some 36%, said they expected bank stress to remain confined to small banks with challenged business models… However, over 20% said they believed that a credit crunch resulting from the bank stress would lead to a noticeable pick-up in corporate defaults.”

April 24 – Financial Times (Kate Duguid): “Retail investors are snapping up new US Treasury bills at a record pace, as they broaden their search for higher-yielding alternatives to bank accounts… Individuals buying Treasury bills through accounts on the Treasury department’s TreasuryDirect site purchased $48.4bn of the debt auctioned by the US government in March…, with demand continuing apace in early April. Meanwhile, executives at brokerages say retail investors have also stepped up buying of Treasury bills in the secondary market, particularly since a number of regional bank failures in March prompted savers to look again at where they were stashing their money.”

April 23 – Financial Times (Mark Vandevelde, Antoine Gara, Joshua Franklin, Colby Smith and Tabby Kinder): “To those caught in its path, the cycle of rumour and panic that destroyed Silicon Valley Bank struck as violently as a tornado. ‘The speed of the world has changed,’ said Sam Altman, the technology executive behind the artificial intelligence phenomenon ChatGPT, shortly after a historic bank run in which customers tried to withdraw at least one-quarter of their deposits in just over 24 hours. ‘People talk fast,’ he added. ‘People move money fast.’ Yet the weeks since the bank collapsed on March 10 have brought an uncomfortable realisation — the problems that provoked the biggest bank run in history were neither a freak occurrence nor an unforeseeable emergency. In interviews… more than a dozen bankers, regulators and executives offered candid impressions of the trouble at the bank and the aftermath of its collapse. Almost all now agree on one thing — the crisis that brought down the bank had been hiding in plain sight.”

April 24 – Reuters (Noele Illien): “Credit Suisse said… $68 billion in assets left the bank in the first quarter and that outflows were continuing, underscoring the challenge faced by UBS Group in rescuing its rival. Customer deposits declined by 67 billion francs in the quarter and the bank noted many matured time deposits had not been renewed. ‘These outflows have moderated but have not yet reversed as of April 24, 2023,’…The net asset outflow followed 110.5 billion francs pulled by clients from the bank in the fourth quarter.”

April 25 – Financial Times (Martin Arnold): “Europe’s financial authorities are quizzing lenders about their exposure to rapidly rising interest rates… Andrea Enria, chair of the European Central Bank’s supervisory board, said the bank was looking at whether unrealised losses on lenders’ bond portfolios, the value of which have sunk as borrowing costs have risen, could erode their capital base in a crisis. Enria told an event… that the ECB would ask banks how much of their so-called ‘interest rate risk’ they had insured by buying hedging products in financial markets. The supervisor was also asking lenders to list the top 20 counterparties that had taken the other side of these contracts.”

Market Instability Watch:

April 24 – Politico (Ben White, Sam Sutton and Eleanor Mueller): “For months, Wall Street has barely focused on the possibility that the government might default on its debt. It’s paying attention now. As the drop-dead date to raise the nation’s $31.4 trillion debt ceiling looms with no deal in sight, traders and executives are starting to get nervous that President Joe Biden and Republicans won’t resolve the impasse until it’s too late. That’s sparked increasing concern about a potential threat that could rock markets and tilt the world’s largest economy into recession. ‘There is this view in D.C. that the market isn’t freaking out enough, and that may be true to an extent,’ said Alec Phillips, chief political economist at Goldman Sachs. ‘But I’ve been dealing almost exclusively with this issue the last few weeks, and there is actually more concern now than even in 2011,’ when Standard & Poor’s downgraded U.S. debt during a similar standoff. ‘It’s just that nobody knows when it’s going to happen or what to do about it.’”

April 24 – Associated Press (Josh Boak): “In January, the U.S. government ran up against its legal borrowing limit of $31.381 trillion, and the Treasury Department began implementing ‘extraordinary measures’ to avoid missing payments on its bills. That started speculation about the ‘x-date’ — the date when those measures would be exhausted and the government might actually default if the limit on federal borrowing is not lifted. The x-date could be reached as early as June, depending on how much money the IRS collects in April… It seems ominous, right? This might be the time to be getting a bit worried as more than three months have passed with little progress. There is only so long these accounting workarounds can last before President Joe Biden and House Speaker Kevin McCarthy need to reach a deal to lift the debt cap.”

April 27 – Bloomberg (Christopher Anstey): “A sudden acceleration in US tax inflows has reduced the likelihood of the Treasury Department being at risk of a federal payments default as soon as June, according to Goldman Sachs… The Wall Street bank last week had warned that anemic revenues were raising the danger of pulling forward the point at which the US government will exhaust its borrowing authority under the federal debt ceiling. But data on tax receipts for Tuesday — when paper checks for federal tax payments were coming in — were unexpectedly large, outpacing the comparable 2022 day by 14%… ‘If the remaining receipts stay on this trend’ the Treasury should ‘be able to continue to make all scheduled payments until the end of July without an increase in the debt limit,’ Alec Phillips, a Goldman economist, wrote…”

April 24 – Bloomberg (Alexandra Semenova and Michael Msika): “The abnormal sense of calm signaled by Wall Street’s favorite volatility gauge could spell trouble for investors who see the market lull as an all-clear to buy stocks, according to JPMorgan’s… Marko Kolanovic. The bank’s top equity strategist said… that the drop in the Cboe Volatility Index, or VIX, is technical in nature, rather than an accurate reflection of the risks facing the stock market. The VIX held near 17 on Monday after falling to 16 last week, a level not seen since late 2021. Kolanovic attributed the decline in the measure to a market currently dominated by options sellers forcing intraday reversion and leaving market prices virtually unchanged most days. ‘This is unusually low given the increase of interest rates, tightening of financial conditions, level of macro risks, and elevated geopolitical tensions,’ he said. ‘This market dynamic artificially suppresses perceptions of macro fundamental risk.’”

April 23 – Financial Times (Nicholas Megaw): “The Vix — the volatility index popularly known as ‘Wall Street’s fear gauge’ — is going through its biggest shake-up in years with the creation of a new version that will track expectations of short-term market swings. The 1-day Volatility Index — or Vix1d — … is a response to a recent transformation in derivatives markets… It will measure expected volatility in the S&P 500 over the next day of trading, rather than over the next month like the Vix. Rob Hocking, Cboe head of product innovation, said… a surge in short-term options trading ‘provided a certain feel to the market that the 30-day just wasn’t capturing . . . we hope the shorter-dated index will match better’.”

Bursting Bubble and Mania Watch:

April 27 – New York Times (Matthew Goldstein, Julie Creswell and Peter Eavis): “A real estate investment fund recently defaulted on $750 million of mortgages for two Los Angeles skyscrapers. A private equity firm slashed the value of its investment in the Willis Tower in Chicago by nearly a third. And a big New York landlord is trying to extend the deadline for paying down a loan for a Park Avenue office tower. Office districts in nearly every U.S. city have been under great stress since the pandemic emptied workplaces… But in recent months, the crisis has entered a tense phase that could damage local economies and cause financial hits to real estate investors and scores of banks. Lenders are increasingly reluctant to make new loans to owners of office buildings… ‘They don’t want to make new office building loans because they don’t want more exposure,’ said Scott Rechler, a New York landlord who is a big player in the city’s office market and sits on the board of the Federal Reserve Bank of New York. The timing of the pullback in lending couldn’t be worse. Landlords need to refinance about $137 billion of office mortgages this year and nearly half a trillion dollars in the following four years…”

April 24 – Wall Street Journal (Konrad Putzier): “Commercial real estate has experienced its share of busts in recent decades. This one is different. Landlords are contending simultaneously with a cyclical market downturn and with secular changes in the way people work, live and shop. The sudden surge in interest rates caused property values to fall, while the rise of remote work and e-commerce are reducing demand for office and retail space. Investors and economists say these two forces haven’t come together on this scale since the 1970s, when a recession followed surging oil prices and a stock-market rout while new technologies enabled jobs to move out of major cities. This time, the pandemic is largely responsible for accelerating the commercial property upheaval. The U.S. office vacancy rate reached a milestone in the first quarter when it rose to 12.9%, exceeding the peak vacancy rate during the 2008 financial crisis. Despite low unemployment, that figure marked the highest vacancy rate since… CoStar Group Inc. began tracking it in 2000.”

April 24 – Wall Street Journal (Will Parker): “Apartment rents in Manhattan are soaring to new highs this year, even as rents plateau or fall in most of the rest of the country. Blackstone Inc. risks losing a portfolio of Manhattan apartments anyway. The real-estate and private-equity firm is in danger of defaulting on a $270 million loan backed by 11 apartment buildings in New York’s most expensive borough. Cash flow from the properties isn’t enough to cover the cost of all the debt, according to… Moody’s… Apartments at the buildings were leased for an average of $3,700 a month in 2019. The median rent in Manhattan has increased another 20% to record highs. Since the Blackstone apartment buildings are mostly market-rate properties, the firm has been able to take advantage of the borough’s price increases. But the rental boom hasn’t been enough to cover Blackstone’s growing maintenance costs on the 11 buildings…”

April 27 – Wall Street Journal (Peter Grant and Jim Carlton): “Before the pandemic, San Francisco’s California Street was home to some of the world’s most valuable commercial real estate. The corridor runs through the heart of the city’s financial district and is lined with offices for banks and other companies that help fuel the global tech economy. One building, a 22-story glass and stone tower at 350 California Street, was worth around $300 million in 2019, according to office broker estimates. That building now is for sale, with bids due soon. They are expected to come in at about $60 million… That’s an 80% decline in value in just four years. This is how dire things have become in San Francisco, an extreme form of a challenge nationwide.”

April 27 – Financial Times (Joshua Oliver): “European commercial real estate dealmaking hit an 11-year low in the first quarter of the year, according to MSCI data… There were €36.5bn worth of deals in the quarter, down 62% from last year, as the sharp rise in interest rates left buyers and sellers struggling to agree on the true price of properties. Falling commercial property values and anxiety in the banking sector after the collapse of Credit Suisse have fuelled concerns that overstretched real estate investors or lenders could be the next source of major financial distress.”

April 26 – New York Times (David Yaffe-Bellany, Emily Flitter and Matthew Goldstein): “For years, the giant cryptocurrency exchange Binance has had a reputation for dodging regulators and skirting financial rules, all without significant consequences. Now the world’s largest crypto exchange is facing mounting legal pressure. Changpeng Zhao, Binance’s founder and chief executive, has hired white-collar defense lawyers at the law firm Latham & Watkins to represent him personally, as he and his company face a tightening legal net. Justice Department prosecutors are investigating the exchange for money laundering violations, as the Securities and Exchange Commission is looking into the company’s business practices. Last month, another agency, the Commodity Futures Trading Commission, sued Mr. Zhao, accusing him of compliance failures that allowed criminals to launder money on Binance.’ The legal threats have converged to create the most precarious moment in Binance’s history.”

April 25 – Reuters (Niket Nishant and Hannah Lang): “Binance.US has called off its $1.3 billion deal to buy assets of bankrupt crypto lender Voyager Digital, citing a ‘hostile and uncertain regulatory climate’… ‘The hostile and uncertain regulatory climate in the United States has introduced an unpredictable operating environment impacting the entire American business community,’ a spokesperson for Binance.US said…”

April 26 – Wall Street Journal (Amrith Ramkumar and Shane Shifflett): “The SPAC boom took hundreds of risky companies to the stock market. The next stop for many is bankruptcy court. Dozens of companies that merged with SPACs are running out of cash, joining at least 12 that have already gone bankrupt after combining with special-purpose acquisition companies. More than 100 companies… are running out of cash, according to a Wall Street Journal analysis… Shares of many of these companies trade under $1, more than 90% below where they did when they went public, and are in danger of being delisted.”

April 27 – Bloomberg (Ayai Tomisawa and Finbarr Flynn): “Japan’s credit market was stung by a uncommon default with hotelier Unizo Holdings Co. filing for a court-supervised restructuring, the first such failure in several years. Unizo said… that it was unable to obtain funds to pay a 10 billion yen ($75 million) bond maturing in May. A total of seven securities… are now due as a result. The case marks a rare instance of an indebted issuer initiating public legal action in Japan…”

April 22 – Financial Times (Tim Bradshaw): “Semiconductor companies have signalled that the industry’s sharpest slowdown in more than a decade is lasting longer than expected, as weakening demand for automotive components compounds slumping personal computer and smartphone sales. Taiwan Semiconductor Manufacturing Company, the world’s largest chip producer, this week pushed back its expectations for a market recovery, as the industry bellwether projected its first decline in annual revenues since 2009.”

Ukraine War Watch:

April 28 – Bloomberg: “Russian forces unleashed a fresh wave of aerial attacks across Ukraine, killing at least 19 people, mostly in the central city of Uman, where a high-rise apartment building was hit. Ukraine’s defense chief said final preparations are under way for a counteroffensive that’s expected to attempt to dislodge Russian forces from parts of Ukraine’s southeast. Russian President Vladimir Putin approved new measures to punish residents of occupied parts of Ukraine that oppose Moscow’s rule.”

April 26 – New York Times (David Pierson): “During his long-anticipated telephone conversation with Ukraine’s president, Volodymyr Zelensky…, China’s top leader, Xi Jinping, spoke of ‘lasting peace’ and ‘respect for sovereignty.’ Not once, however, did China’s official summary of their nearly hourlong call mention the name of the country that invaded Ukraine. The omission of Russia, as well as the word ‘war,’ underscores how closely aligned Beijing and Moscow remain — and it highlights how difficult it will be for China to cast itself as a credible peace mediator in Ukraine. As with China’s position paper on a peace settlement in Ukraine released in February, Mr. Xi provided no concrete plans to end the fighting, instead referring to ‘dialogue and negotiation.’”

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

April 27 – Financial Times (Joe Leahy and Christopher Miller): “Chinese president Xi Jinping has met or called his Russian counterpart at least five times since Moscow’s full-scale invasion of Ukraine. But his first call to Ukraine’s Volodymyr Zelenskyy came just this week, days after a Chinese envoy angered Europe by questioning the sovereignty of post-Soviet states. Chinese officials say the timing was coincidental and have hailed the call as the latest step in Beijing’s push for peace. But in Europe, the call to the Ukrainian leader is viewed by many as an attempt to contain the fallout from the remarks by the ambassador to France. ‘They need to do some damage control after the Paris ambassador’s comments,’ said one senior EU official.”

April 23 – Reuters (John Irish and Ryan Woo): “France, Ukraine and the Baltic states of Estonia, Latvia and Lithuania expressed dismay after China’s ambassador in Paris questioned the sovereignty of former Soviet countries like Ukraine. Asked about his position on whether Crimea is part of Ukraine or not, Chinese ambassador Lu Shaye said in an interview aired on French television… that historically it was part of Russia and had been offered to Ukraine by former Soviet leader Nikita Khrushchev. ‘These ex-USSR countries don’t have actual status in international law because there is no international agreement to materialize their sovereign status,’ Shaye added.”

April 24 – Financial Times (Joe Leahy, Yuan Yang and Henry Foy): “Beijing has been forced to backtrack after its ambassador to France sparked a furore in Europe at the weekend by questioning the legal status of former Soviet states and Ukraine’s sovereignty over Crimea. China’s foreign ministry… contradicted the comments from Lu Shaye, who had infuriated European capitals and fuelled distrust about Beijing’s ambitions to mediate the war in Ukraine by suggesting that former Soviet states lacked ‘effective status under international law’. Lu added that the issue of Crimea, which Russia annexed in 2014, was ‘not simple to answer with a few words’.”

April 24 – Reuters (Andrew Gray, Liz Lee and Michel Rose): “China respects the status of former Soviet member states as sovereign nations, its foreign ministry said…, distancing itself from comments by its envoy to Paris that triggered an uproar among European capitals. Several European Union foreign ministers had said comments by ambassador Lu Shaye – in which he questioned the sovereignty of Ukraine and other former Soviet states – were unacceptable and had asked Beijing to clarify its stance… The Chinese embassy in Paris issued a statement later on Monday to say that Lu’s comments on Ukraine ‘were not a political declaration but an expression of his personal views’.”

April 24 – Reuters (Michelle Nichols): “U.N. Secretary-General Antonio Guterres said… that the risk of conflict between global powers was at an ‘historic high’ and Russian Foreign Minister Sergei Lavrov warned the world was at a threshold ‘possibly even more dangerous’ than during the Cold War. Guterres, seated next to Lavrov in the U.N. Security Council, criticized Russia’s invasion of Ukraine for causing massive suffering and devastation in the country and fueling global economic dislocation caused by the coronavirus pandemic. ‘Tensions between major powers are at an historic high. So are the risks of conflict, through misadventure or miscalculation,’ Guterres told the meeting… Lavrov chaired the council meeting because Russia holds the council’s monthly rotating presidency for April. ‘As during the Cold War, we have reached the dangerous, possibly even more dangerous, threshold,’ Lavrov said. ‘The situation is worsened with the loss of trust in multilateralism.’”

April 24 – Bloomberg: “United Nations Secretary General Antonio Guterres confronted Russian Foreign Minister Sergei Lavrov at the Security Council…, denouncing Russia’s invasion of Ukraine as a violation of the UN Charter as well as international law. Lavrov sat impassively next to Guterres at the council’s iconic horseshoe-shaped table, but then launched into a tirade against the US and its allies when he spoke next. Russia’s invasion ‘is causing massive suffering and devastation to the country and its people,’ Guterres said. ‘We must find a way forward and act now as we have done before to stop the slide toward chaos and conflict.’”

April 25 – Reuters (Guy Faulconbridge): “An ally of Russian President Vladimir Putin said… the world was probably on the verge of a new world war and the risks of a nuclear confrontation were rising. ‘The world is sick and quite probably is on the verge of a new world war,’ Dmitry Medvedev, deputy chairman of Putin’s powerful security council, told a conference in Moscow. He said such a new world war was not inevitable but the risks of a nuclear confrontation were growing and more serious than concerns about climate change.”

April 26 – Associated Press (Edith M. Bederer): “Russia’s top diplomat warned… the European Union ‘is becoming militarized at a record rate’ and aggressive in its goal of containing Russia. Foreign Minister Sergey Lavrov told a news conference he has no doubts that there is now ‘very little difference’ between the EU and NATO.”

De-globalization and Iron Curtain Watch:

April 23 – Reuters: “Former Russian president Dmitry Medvedev said… that if the G7 moved to ban exports to Russia, Moscow would respond by terminating the Black Sea Grain deal that enables vital exports of grain from Ukraine. The Group of Seven (G7) countries are considering a near-total ban on exports to Russia, Japan’s Kyodo news agency reported last week… Russia has repeatedly threatened to scrap its participation in the grain deal, which is due to expire on May 18.”

April 28 – Associated Press (Joe McDonald): “Foreign companies are under growing pressure in China from anti-corruption, security and other investigations as President Xi Jinping’s government tightens control over business… This week, Bain & Co. said police questioned staff in its Shanghai office… Last month, the corporate due diligence firm Mintz Group said its Beijing office was raided by police who detained five employees. Also last month, an employee of a Japanese drug maker was detained on spying charges and the government announced a security review of memory chip maker Micron Inc.”

April 27 – Reuters (Rahat Sandhu): “Germany may limit the export of chemicals to China that are used to manufacture semiconductors as part of the government’s efforts to reduce its economic exposure to the Asian economic superpower, Bloomberg news reported… The move was still in the early stages of discussion but officials taking part in the talks were aware that such a step could damage business ties with Beijing…”

April 26 – Bloomberg: “Russia took control of utilities owned by Finland’s Fortum Oyj and Germany’s Uniper SE, the first such move from the Kremlin in retaliation for asset freezes by European countries over its invasion of Ukraine. Russian President Vladimir Putin signed a decree… that allows the government to introduce ‘temporary’ state control over the assets of companies or individuals from ‘unfriendly’ states — which include the US and its allies – in response to similar moves, or the threat of them, by those countries.”

Inflation Watch:

April 25 – Financial Times (Katie Martin and Richard Milne): “The global economy is experiencing climate-driven inflation that will contribute to stubbornly high price rises and a long period of low investment returns, according to the head of Norway’s $1.3tn oil fund. ‘Inflation is going to be tough to get down,’ said Nicolai Tangen, chief executive of the world’s largest sovereign wealth fund… Labour costs are leaking into global price rises, but ‘we are seeing a climate impact’ he added, pointing to rising prices for olive oil, potatoes and coffee as anecdotal signs that food costs could pump up inflation for years. A heavy price tag for the green energy transition and a reversal of the globalisation that had held down manufacturing costs for decades were also part of the ‘mosaic’, Tangen said.”

April 24 – Bloomberg (Benjamin Schneider): “In 2020, Austin voters overwhelmingly approved a $7 billion public transit plan. In the initial phase, two new light rail lines would criss-cross the city, augmenting existing Capital MetroRail service with trains connecting the University of Texas, the Texas State Capitol, the airport, and fast-growing neighborhoods like South Congress, Riverside and North Lamar. At the center of this initiative, known as Project Connect, would be a downtown subway tunnel, allowing trains to bypass traffic-choked streets above. Then the costs started going up. The estimated price tag for the light rail expansion nearly doubled, from $5.8 billion in the 2020 plan to $10.3 billion in 2022.”

Biden Administration Watch:

April 25 – Reuters (Andrea Shalal): “U.S. Treasury Secretary Janet Yellen… warned that failure by Congress to raise the government’s debt ceiling – and the resulting default – would trigger an ‘economic catastrophe’ that would send interest rates higher for years to come. Yellen… said a default on U.S. debt would result in job losses, while driving household payments on mortgages, auto loans and credit cards higher. She said it was a ‘basic responsibility’ of Congress to increase or suspend the $31.4 trillion borrowing cap… ‘A default on our debt would produce an economic and financial catastrophe,’ Yellen told Sacramento Metropolitan Chamber of Commerce members. ‘A default would raise the cost of borrowing into perpetuity. Future investments would become substantially more costly.’”

Federal Reserve Watch:

April 23 – Reuters (Colby Smith): “US central bankers face a tricky balancing act as they prepare to deliver another interest rate increase next month, weighing evidence that inflation is still too high against a pullback in lending following the recent banking turmoil. Ahead of the quiet period before their next policy meeting in early May, officials at the Federal Reserve have tacitly endorsed another rate rise, in a move that would lift the federal funds rate above 5% for the first time since mid-2007. Beyond that point, however, policymakers have been non-committal about how much more they will need to do to get inflation under control.”

U.S. Bubble Watch:

April 27 – Bloomberg (Christopher Anstey and Reade Pickert): “The US economy was slowing even before the brunt of any credit crunch stemming from the recent bank failures, while inflation accelerated, highlighting the enormous challenge faced by the Federal Reserve. Gross domestic product rose an annualized 1.1% in the first quarter, notably less than the median forecast for 1.9%… The slowdown was largely driven by an inventory drawdown, with an acceleration in consumer spending providing the main impetus for growth… Frustratingly for the Fed, the central bank’s preferred core gauge of prices, which excludes food and energy, picked up to 4.9% in the January-through-March period, the quickest pace in a year.”

April 25 – Bloomberg (Prashant Gopal): “Annual home-price gains in the US eased in February as higher borrowing costs pressure buyers. Home prices nationally rose 2% from a year earlier in February, slower than the 3.7% increase in January, according to… S&P CoreLogic Case-Shiller. Markets across the country have cooled off after a sudden and rapid surge in borrowing costs… While demand in certain areas has started to pick up, a lack of listed homes is pressuring sales… Geographical areas had some ‘stark’ differences, according to Lazzara. Prices in Miami were up 10.8% year-over-year. Tampa, Florida, and Atlanta were also among cities with large increases. Meanwhile, certain cities on the West Coast have struggled. Prices in Los Angeles were down 1.3%.”

April 27 – Reuters (Dan Burns): “Contracts to buy U.S. previously owned homes tumbled unexpectedly in March to snap a three-month rebound, raising a caution flag about what had appeared to be a nascent recovery… The National Association of Realtors (NAR) said… its Pending Home Sales Index, based on signed contracts, fell 5.2% last month to 78.9, the lowest since December.”

April 26 – Reuters (Lucia Mutikani): “New orders for key U.S.-manufactured capital goods fell more than expected in March and shipments declined, suggesting that business spending on equipment likely remained a drag on economic growth in the first quarter… Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, dropped 0.4% last month. Data for February was revised down to show a 0.7% drop in these so-called core capital goods orders instead of the previously reported 0.1% dip.”

Fixed Income Watch:

April 28 – Bloomberg (Michael Gambale): “The US investment-grade primary market is expected to stay quiet on Friday…, as syndicate desks wrap up the month with sales on track to miss estimates by 35%. The market is looking to bounce back next week with an optimistic call for $30 billion to $35 billion.”

April 26 – Financial Times (Eric Platt, Sujeet Indap and Harriet Clarfelt): “When a debt-laden company gets into financial distress, the fights between creditors are often ugly, but investors in leveraged loans could usually watch from the sidelines while more junior claimants haggled over what they would be repaid. Not any more. A recent court decision threatens to escalate creditor-on-creditor violence in a normally sedate $1.4tn corner of the financial markets that is critical to funding big private equity deals and the operations of lowly-rated businesses. The ruling, in the Texas bankruptcy case of Serta Simmons, blessed a controversial 2020 debt swap that only a slim majority of the mattress maker’s senior lenders had approved. Other holders of the company’s loans… were pushed further back in the queue to be repaid and the value of the loans they held crashed when Serta ultimately went bust.”

China Watch:

April 25 – Bloomberg: “The NDRC is ‘urgently studying’ and drafting polices to boost consumption, China Securities Journal reported… The measures focus on key areas such as stabilizing consumption in commodities, services and rural areas, said the newspaper owned by the official Xinhua News Agency. The government should introduce vouchers to boost retail consumption, the report cited Tu Qiang, an analyst at Shenwan Hongyuan Securities, as saying…”

April 26 – Reuters (Kevin Yao): “China’s job market remains tough, and it is becoming especially hard for college graduates to find jobs, vice Human Resources minister Yu Jiadong said… China’s cabinet on Wednesday unveiled plans to boost employment, including supporting financial institutions to offer loans to small firms and issuing subsidies to firms that hire college graduates or unemployed young people.”

April 22 – Financial Times (Sun Yu): “China is shifting the blame for soaring youth unemployment on to jobless university graduates, accusing them of refusing to put aside their professional ambitions and take on manual labour. In recent weeks, state broadcasters and news agencies have published more than a dozen profiles of recent university graduates who allegedly made a fortune in low-skilled jobs such as selling street food or growing fruit… The Communist Youth League last month criticised young graduates for holding on to their professional aspirations, accusing them of refusing to ‘tighten screws in factories’ and exhorting the current generation to ‘take off their suits, roll up their sleeves and go to the farmland’. But the government’s narrative has drawn scorn on social media…”

April 24 – Reuters: “China nudged banks this month to cut deposit interest rates further, seven people with knowledge of the matter said, in the latest effort to channel the country’s vast savings pool into spending and more productive investments. Members of China’s ‘interest rate self-regulatory mechanism,’ mostly banks, met this month and were urged to reduce deposit rates… ‘The message is that banks need to collectively bring down deposit rates,’ one person with knowledge of the directive said.”

April 26 – Reuters (Qiaoyi Li and Ryan Woo): “China’s industrial firms’ profits shrank at a slightly slower pace in January-March but the decline remained in the double-digits as the economy struggled to fully recover… Profits at these firms fell 21.4% in the first three months from a year earlier…”

April 28 – Bloomberg: “China’s biggest lenders, including Industrial & Commercial Bank of China Ltd., eked out profit growth in the first quarter of 2023 as they wrestled with shrinking margins and the lingering economic impact of China’s exit from Covid zero. Net income at ICBC rose 0.02% to 90.2 billion yuan ($13bn) from the year-earlier period… China Construction Bank Corp. posted a 0.3% gain, Bank of China Ltd. a 0.5% increase and Agricultural Bank of China Ltd. a 1.75% gain… Profit at Bank of Communications Co. rose 5.6%.”

April 28 – Bloomberg: “China’s property market slump is showing some signs of having hit bottom but that’s not translating into increased demand for new mortgages, which grew by the smallest amount on record in the first three months of this year…”

April 24 – Bloomberg: “One of China’s poorest and most indebted provinces is making a stronger push for state help to diffuse its financial risk, after local authorities recently sought to draw Beijing’s attention to the severity of its debt burden. The southwestern Guizhou province has signed a cooperation agreement with China Cinda Asset Management Co., the nation’s top state-owned distressed asset manager… Cinda said a few days later it will send a group of 50 financial experts to Guizhou as part of efforts to help.”

April 26 – Bloomberg: “A security software company is set to become the first Chinese firm to have a convertible bond delisted after reporting a full-year loss for 2022. The bond due 2024 was issued by Bluedon Information Security Technology Co. and will likely be removed… after the trading of its convertible bonds and shares were halted… The delisting of the convertible bond, with an outstanding amount of about 100 million yuan, would be the first time the exchange had a forced removal in its history… It threatens to hurt one of China’s safest bets, given that the $125 billion convertible bonds market was preferred by seasoned investors for its low credit risk and lack of defaults… There are currently more than 500 publicly-traded convertible bonds in Shanghai and Shenzhen…”

April 26 – Financial Times (Hudson Lockett and Cheng Leng): “Chinese equities have suffered a brutal sell-off since China reported a strong first-quarter of economic growth, in a sign of investor doubts over whether the country can sustain its rebound. Stocks included in the benchmark indices of the Shanghai and Shenzhen stock exchanges have together lost almost Rmb3.6tn ($519bn) in market capitalisation since April 18…”

Central Banker Watch:

April 24 – Financial Times (Martin Arnold): “Investors are underestimating how high eurozone borrowing costs will rise, the head of Belgium’s central bank has warned, insisting he will only agree to halt interest rate rises once wage growth starts to fall. Pierre Wunsch… told the Financial Times: ‘We are waiting for wage growth and core inflation to go down, along with headline inflation, before we can arrive at the point where we can pause.’ His focus on wage growth raises the bar on the conditions that have to be fulfilled before the ECB will stop raising rates. The central bank has already raised its deposit rate at an unprecedented pace from minus 0.5% last July to 3% in March. ‘I would not be surprised if we had to go to 4% at some point,’ said Wunsch…”

April 26 – Bloomberg (Niclas Rolander): “The Riksbank delivered another half-point hike in borrowing costs and pledged one more salvo, with the dovish outlook slamming the krona. Two officials opposed the move by the Swedish central bank to raise the interest rate to 3.5%, favoring a smaller quarter-point step.”

April 28 – Reuters (David Milliken): “The Bank of England estimated… its quantitative easing programme would rack up a total financial loss of around 100 billion pounds ($125bn) by 2033, which will need to be funded by the government. In the short term, the BoE expects the government will need to pay it almost 30 billion pounds a year…”

Bursting Global Bubble Watch:

April 25 – Bloomberg (Selcuk Gokoluk): “Across eastern Europe, the financial toll of Vladimir Putin’s 14-month-old war on Ukraine is piling up. Energy subsidies are being doled out, armies built up and refugees housed, schooled and fed. To help pay those bills, Ukraine’s neighbors are tapping international debt markets like never before. Governments in eastern Europe have borrowed nearly $32 billion already this year, triple the amount from the same period last year… And for the first time in a dozen years, three eastern European countries — Poland ($9bn), Romania ($6bn) and Hungary ($5bn) — register among the top five emerging-market borrowers…”

Europe Watch:

April 28 – Reuters (Francesco Canepa and Belén Carreño): “The euro zone economy is barely growing but inflation in the bloc remains high, leaving the European Central Bank with little choice but to inflict more financial pain on households and businesses to tame prices… Economic output in the euro zone increased by just 0.1% in the first three months of the year as domestic consumption stagnated in many economies… But national data showed price growth was only falling slowly, probably leaving the ECB with no choice but to keep raising interest rates.”

April 24 – Politico (Jamil Anderlini): “Just when you thought Europe’s China policy could not be more disunited, the two most powerful countries of the European Union are now also at odds over whether to revive a moribund investment agreement with the authoritarian superpower. For France, resuscitating the so-called EU-China Comprehensive Agreement on Investment (CAI) is ‘less urgent’ and ‘just not practicable,’ according to French President Emmanuel Macron. Meanwhile, German Chancellor Olaf Scholz is in favor of ‘reactivating’ the agreement, which stalled soon after it was announced in late 2020 after Beijing imposed sanctions on several members of the European Parliament for criticizing human rights violations.”

April 25 – Bloomberg (Aline Oyamada): “Italy is the only country that could lose its investment-grade rating at Moody’s…, the company said… In a report surveying how nations have dealt with downgrades to junk over the past three decades, the euro zone’s third-biggest economy was highlighted as a prominent candidate for such a status adjustment… ‘Italy is currently the only Baa3-rated sovereign with a negative outlook,’ wrote analysts… ‘Sluggish growth and higher funding costs may further weaken Italy’s fiscal position.’”

Japan Watch:

April 28 – Bloomberg (Toru Fujioka and Sumio Ito): “The Bank of Japan scrapped its guidance on future interest rate levels while keeping its main stimulus measures unchanged, as Governor Kazuo Ueda prepared the ground for taking a more flexible stance on policy. The BOJ maintained its rock-bottom interest rate and asset purchase settings at the end of a two-day gathering Friday… The central bank also called for a long-term review of its policies and issued new price forecasts that show inflation below 2% again in the fiscal year ending March 2026. The decision to keep stimulus in place in pursuit of stronger inflation keeps the BOJ in a very different place to its price-fighting global peers for now.”

April 27 – Reuters (Takaya Yamaguchi and Leika Kihara): “Core consumer inflation in Japan’s capital beat expectations in April and an index stripping away fuel costs rose at the fastest pace in four decades, highlighting the challenge the new central bank chief faces in keeping ultra-low interest rates… The core consumer price index (CPI)… for Tokyo rose 3.5% in April from a year earlier…, faster than a median market for a 3.2% rise and well above the BOJ’s 2% target. It accelerated from a 3.2% increase in March. The core-core CPI, which strips away both fresh food and fuel costs, rose 3.8% in April from a year earlier… The core-core index, which is closely watched by the BOJ in gauging trend inflation, rose at the fastest annual pace since April 1982…”

April 24 – Reuters (Leika Kihara): “Bank of Japan (BOJ) Governor Kazuo Ueda on Tuesday stressed the need to keep monetary policy ultra-loose for now, but signalled the chance of raising interest rates if inflation and wage growth overshot expectations. ‘In light of current economic, price and financial developments, it’s appropriate to maintain monetary easing, now conducted through yield curve control,’ Ueda told parliament. The shape of Japan’s bond yield curve has normalised due in part to falling global yields, Ueda said, when asked by an opposition lawmaker about the demerits of prolonged monetary easing.”

April 25 – Reuters (Leika Kihara): “Bank of Japan Governor Kazuo Ueda said… the central bank’s response to cost-push inflation would depend on economic conditions. ‘In general, dealing with cost-push inflation is very difficult for central banks. On the one hand, you’d like to curb inflation. On the other hand, you don’t want to tighten monetary policy knowing that cost-push inflation will cool the economy,’ Ueda told parliament. ‘Striking the right balance is very difficult. It depends on economic developments at the time, including where inflation stood at the outset,’ he said.”

EM Crisis Watch:

April 27 – Reuters (Jorge Otaola): “Argentina’s central bank hiked its benchmark interest rate 10 percentage points to 91% on Thursday…, as it tries to tame high inflation and steady the peso currency, which has tumbled in black market trading. With Argentina’s inflation rate running at more than 100%, the country’s central bank had already hiked the rate last week by 300 basis points to 81% in an effort to get it under control.”

Leveraged Speculation Watch:

April 25 – Financial Times (Katie Martin and Robin Wigglesworth): “Billionaire investor Stanley Druckenmiller is betting against the US dollar as his only high-conviction trade in what he believes is the most uncertain environment for markets and the global economy in his 45-year career. Druckenmiller… said he felt confident taking a negative position against the greenback because of his dim view of US policymaking. The US dollar, which rallied strongly last year, has already declined by 10% against a basket of other leading currencies since a November peak, but Druckenmiller believes it has much further to fall. ‘One area I’m comfortable is I’m short the US dollar,’ he said… ‘Currency trends tend to run for two or three years. We have had a long [run] higher.’”

April 24 – Bloomberg (Garfield Reynolds): “Hedge funds are betting on higher Treasury yields in a market that’s divided over whether the US economy can avoid recession and Federal Reserve interest-rate cuts. Recent positioning data suggests leveraged investors are about as confident as the central bank is that a slump be dodged even as the past year’s inflation-fighting policy tightening bites on activity. That group of investors boosted net shorts on 10-year Treasury futures to a record 1.29 million contracts as of April 18… It was the fifth straight week that net shorts had increased.”

Geopolitical Watch:

April 28 – Bloomberg (Isabel Reynolds): “China’s ambassador warned Japan that Taiwan was a red line not to be crossed, and said the detention of an employee of Japanese drugmaker Astellas Pharma Inc. was related to a spying incident that damaged Beijing’s sovereignty. ‘Foreign forces are colluding with Taiwan independence forces,’ and conducting repeated provocations, Wu Jianghao told reporters…, saying their ultimate goal was to split Taiwan from China. Whipping up a division in China would ‘lead the Japanese people into a fire,’ he added. Japanese officials have said any contingency in Taiwan would amount to a contingency in Japan…”

April 28 – Financial Times (Kathrin Hille): “The Philippines and Taiwan have disclosed new details about recent coercive Chinese actions in nearby waters and airspace, as both countries push back against Beijing’s use of its growing military capabilities to enforce its territorial claims. The Philippine coast guard said… that aggressive moves by Chinese naval and coast guard vessels caused a ‘confrontation’ with two of its ships during a week-long patrol in the disputed South China Sea. Meanwhile, Taiwan’s defence ministry reported that a TB-001 drone circumnavigated the country’s main island in the 24-hour period to 6am on Friday…”

April 27 – Associated Press (Jim Gomez): “A Chinese coast guard ship blocked a Philippine patrol vessel steaming into a disputed shoal in the South China Sea, causing a frightening near-collision in the latest act of Beijing’s aggression in the strategic waterway. The high seas face-off Sunday between the larger Chinese ship and the Philippine coast guard’s BRP Malapascua near Second Thomas Shoal was among the tense moments it and another Philippine vessel encountered in a weeklong sovereignty patrol in one of the world’s most hotly contested waterways. The Philippine coast guard had invited a small group of journalists… to join the 1,038-mile patrol for the first time as part of a new Philippine strategy aimed at exposing China’s increasingly aggressive actions in the South China Sea…”

April 26 – Reuters (Ben Blanchard and Roger Tung): “Taiwan’s annual military drills this year take into account China’s recent war games and focus on breaking a blockade, the defence ministry said on Wednesday, as a senior security official said Taiwan now had a ‘Five Eyes’ intelligence link. China… has ramped up military pressure in the past three years to try to assert its sovereignty claim… Taiwan’s defence ministry said the ‘Han Kuang’ exercises would be split into two parts – tabletop drills from May 15 to 19, and forces mobilised from July 24 to 28 in live-fire exercises.”

April 26 – Reuters (Trevor Hunnicutt, Steve Holland and David Brunnstrom): “The U.S… pledged to give South Korea more insight into its nuclear planning over any conflict with North Korea amid anxiety over Pyongyang’s growing arsenal of missiles and bombs. The announcement, which included a renewed pledge by Seoul not to pursue a nuclear bomb of its own, emerged from White House talks between U.S. President Joe Biden and South Korean leader Yoon Suk Yeol that covered issues including North Korea, semiconductor chips and trade and the Ukraine war.”

April 27 – Reuters (Maria Ponnezhath): “Iran seized a Marshall Islands-flagged oil tanker in the Gulf of Oman in international waters…, the U.S. Navy said, the latest in a series of seizures or attacks on commercial vessels in sensitive Gulf waters since 2019. Iran’s army said it had seized a Marshall Islands-flagged oil tanker in the Gulf of Oman after it collided with an Iranian boat, injuring several crewmen, Iranian state media reported.”

April 27 – Wall Street Journal (Nicholas Bariyo and Gabriele Steinhauser): “A rivalry between Sudan’s top two generals erupted into warfare on April 15, pitting the East African country’s military against a state-sponsored militia called the Rapid Support Forces. The military is using jet fighters to strike RSF positions, many in densely populated areas, while both factions are engaging in street battles using guns and artillery fire… Lt. Gen. Abdel Fattah al-Burhan, the commander of the military, and Lt. Gen. Mohamed Hamdan Dagalo, who leads the RSF, joined forces in 2019 to oust Sudan’s longtime dictator, Omar al-Bashir, following months of popular protests. Two years later, they toppled a civilian transitional government that was meant to lead the country toward democratic elections.”

April 23 – Reuters (Khalid Abdelaziz and Nafisa Eltahir): “The armed forces of the United States and the United Kingdom have evacuated embassy staff from Sudan, while other nations rushed to get their citizens to safety as rival military factions battled in the capital Khartoum… The eruption of fighting eight days ago between the army and the Rapid Support Forces (RSF) paramilitary group has triggered a humanitarian crisis, killed 420 people and trapped millions of Sudanese without access to basic services.”

April 24 – Wall Street Journal (Editorial Board): “A report… details a boom in military spending from Europe to Asia, and mark it down as the sign of a nervous world with dictators on the march. The U.S. is less prepared for this precarious moment than the official statistics suggest, and the risks of inaction are growing. World military expenditures rose 3.7% in real terms in 2022, according to the Stockholm International Peace Research Institute… By far the sharpest rise in spending came from Europe (up 13%). The pity is that it took a land war on the European continent—Vladimir Putin’s invasion of Ukraine—to persuade NATO allies to spend more on their own hard power. Lithuania’s account is up 27%. Poland’s spending increased 11%, and Warsaw is above the North Atlantic Treaty Organization’s target of dedicating 2% of GDP to defense. Finland’s military spending increased 36% in 2022, the ‘highest year-on-year increase’ since 1962…”

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