August 19, 2022: Inaugural Squeeze

MARKET NEWS / CREDIT BUBBLE WEEKLY
August 19, 2022: Inaugural Squeeze
Doug Noland Posted on August 20, 2022

It was in ways business as usual. “Risk off” had attained powerful momentum globally back in July. De-risking/deleveraging dynamics were increasingly fomenting illiquidity, contagion and instability across global markets. Bubbles were bursting. Derivatives-related selling was starting to overwhelm. In short, global markets were at the cusp of serious dislocation – of “seizing up”. And, as they’ve done on numerous occasions over the years, markets peered over the edge, grimaced and abruptly recoiled.

This dynamic has become all too familiar: when instability turns sufficiently serious, markets instinctively anticipate dovish central bank policy responses. The ECB (“Doubting our commitment would be a serious mistake”) was right on cue with its new “anti-fragmentation” tool. The Bank of Japan did its part, assuring global markets that the BOJ was anything but contemplating stepping back from ultra-easy monetary policy or its yield curve ceiling. In Beijing, it was a veritable laundry list of stimulus measures. Meanwhile, Fed officials were providing enough mixed messages that it was reasonable to interpret waffling as a precursor to a dovish pivot. After all, Powell had been adamant that “financial conditions” would be a FOMC focal point.

Without a doubt, financial conditions had tightened dramatically. Using July 14th for a snapshot: The S&P500 ended the session with a year-to-date loss of 20%. The Nasdaq100 was down 28%, while the Banks (BKX) ended the session with a 2022 loss of 25%. High yield CDS traded as high as 560 bps, after beginning the year at 293 bps. The junk bond market had gone weeks without a new issue. Commodities markets were under major pressure, with the Bloomberg Commodities Index sinking 20% from early-June highs.

And then the “Everything Squeeze”: From July lows, the S&P500 rallied as much as 19%. The Nasdaq100 recovered 24%, and Bank stocks rallied 20%. The Goldman Sachs Short Index surged 43% off lows. High yield CDS collapsed 180 to 405 bps. And after trading to 3.48% on June 14th, 10-year Treasury yields were down to 2.58% by August 1st.

And as is typical, rallying markets then enjoyed confirmation of the bullish narrative from positive economic data. There was the booming June jobs report, the ISM Services Index, Factory Orders, Durable Goods, Consumer Credit and, of course, July CPI data. Everything seemed to be falling into place. Sentiment – that had shifted to bearish extremes – quickly returned home to comfy bullishness.

But the more things stay the same, the more they change. I’ll posit that we’ve now experienced the first Squeeze of the New Cycle. In the previous cycle, major short Squeezes invariably launched new legs higher for the perpetual bull market. Squeezes and resurgent leveraged speculation would ensure a major loosening of financial conditions. And, importantly, looser monetary policy (i.e. “dovish pivots”) would validate already loosening market conditions. Dynamics created the appearance of endless liquidity.

These days, bullish markets, luxuriating in newfound liquidity abundance, face an unfamiliar policy backdrop. Rather than a “dovish pivot,” the Fed is poised to plow ahead with its first real tightening cycle in 28 years. Moreover, the Squeeze rally and attendant loosening of financial conditions only places more pressure on the Fed.

August 18 – Reuters (Howard Schneider): “The recent easing of U.S. financial conditions, including a surge in stock prices, may have been based on an overly optimistic sense that inflation was peaking and the pace of interest rate increases was likely to slow, Kansas City Federal Reserve President Esther George said… George said the pace and ultimate level of future rate hikes remained a matter of debate. ‘To know where that stopping point is … we are going to have to be completely convinced that (inflation) number is coming down,’ she said.”

It’s worth pondering how extraordinary this all has become: The Federal Reserve is actually pushing back against a loosening of financial conditions. Talk about the polar opposite of Bernanke’s momentous proclamation back in 2013 that the Fed would “push back” against a market tightening of financial conditions – basically signaling to the markets that the Fed wouldn’t tolerate sinking stock prices or rising risk premiums. Today, rallying risk markets counteract Fed tightening measures, compounding the Fed’s challenge of fighting inflation without inevitably crashing the markets and economy.

Yet the Squeeze rally has much more to be anxious about than just higher Fed policy rates. The global backdrop is fraught with extreme risk. The Squeeze erupted with the global “Periphery” at the brink of acute instability. Not surprisingly, fringe companies, countries and markets saw some of the most spectacular Squeeze-induced gains (i.e. U.S. meme stocks and the “frontier” emerging markets). And it is now the vulnerable “Periphery” that we would expect in the crosshairs as Squeeze Dynamics dissipate and “Risk Off” reemerges. We saw exactly this dynamic unfold this week.

EM CDS surged 42 for the week to 322 bps, the largest weekly increase since war erupted in Ukraine back in March. Sovereign CDS prices jumped 117 bps in Turkey, 44 bps in South Africa, 33 bps in Colombia, and 20 bps in Brazil. “Frontier” markets were pummeled, with CDS up 555 bps in Pakistan, 136 bps in Ghana, 94 bps in Angola, and 79 bps in Tunisia. EM currencies were under heavy pressure. The Chilean peso dropped 7.3%, the Colombian peso 5.0%, the South African rand 4.9%, the Hungarian forint 4.9%, the Polish zloty 4.0%, and the Czech koruna 3.4%.

EM bonds were hammered. Yields surged 71 bps in Hungary (8.26%), 61 bps in Poland (5.95%), 53 bps in the Czech Republic (4.15%), 39 bps in Mexico (8.23%), 38 bps in Brazil (12.23%), and 27 bps in South Africa (10.71%). Dollar-denominated EM debt was not spared. Turkey dollar yields surged 113 bps (10.52%), Mexico 53 bps (5.18%), Chile 38 bps (4.64%), Indonesia 36 bps (4.05%), Brazil 31 bps (5.75%), and Panama 30 bps (4.86%).

In short, de-risking/deleveraging was this week back with a vengeance at the “Periphery”. And the eerie calm that had enveloped European debt markets has begun to dissolve. Italian yields surged 43 bps this week to a one-month high 3.50%. Greek yields jumped 46 bps to 3.69%. Yields were up 29 bps in both Spain and Portugal. European high yield (“crossover”) CDS surged 62 to 525 bps – the largest gain since the tumultuous week of June 17th.

The Big Squeeze emerged as the situation in China took a turn for the worse. A Monday Bloomberg headline: “China Shocks With Rate Cut as Data Show ‘Alarming’ Slowdown.”

August 16 – Bloomberg: “China’s surprise interest-rate cut has done little to allay concern over the property and Covid Zero-led slowdown, with economists and state media calling for additional stimulus. In a front-page report…, the central-bank backed Financial News said Beijing should introduce new pro-growth policies at the appropriate time to keep growth within a reasonable range, citing Wen Bin, chief economist at China Minsheng Bank. The Securities Times said in a separate report the People’s Bank of China’s surprise rate cut may be the first in a series of policies to stabilize growth.”

August 15 – Bloomberg: “China’s economic slowdown deepened in July due to a worsening property slump and continued coronavirus lockdowns, with an unexpected cut in interest rates unlikely to turn things around while those twin drags remain. Retail sales, industrial output and investment all slowed and missed economists estimates in July. The surveyed jobless rate for those aged 16-24 climbed to 19.9%, a record high and headache for the Communist Party as it gears up for a major congress in coming months that’s expected to give President Xi Jinping a precedent-defying third term in power.”

Add to the list of disappointing Chinese data July’s atrocious Credit numbers. Aggregate Financing (China’s metric of system credit) increased only $112 billion during the month, down huge from June’s strong (quarter-end lending push) $767 billion and almost a third lower than July 2021. Both Aggregate Financing and New Bank Loans were only about half the expected level. Consumer (chiefly mortgages) Loans shriveled to only $18 billion, down from June’s $126 billion and July 2021’s $60 billion. At 7.7%, one-year Consumer Loan growth was the weakest in decades, down from that 11.6% rate to start the year.

Developer bonds rallied this week on talk of aggressive Beijing support (including bond guarantees). Still, the Shanghai Composite declined 0.6%. Ominously, the renminbi dropped 1.1% versus the dollar to a near two-year low. Inflation and the global tightening cycle are doing no favors for Beijing’s easing measures or its currency.

I’ve been around long enough to know that calling the end of major Squeezes is risky business. But, then again, this is a unique backdrop. I believe the de-risking/deleveraging hiatus has run its course, at least at the global “Periphery”. Ominously, this week was reminiscent of June, where pressure on EM currencies and bonds negatively impacted “developed” bond markets (including bunds and Treasuries). It’s a problematic cycle: De-risking/deleveraging, faltering EM currencies, EM central bank Treasury/developed bond liquidations to fund currency support, higher yields forcing “developed” market deleveraging, and resulting evaporating global liquidity.

Bund yields surged 24 bps this week to 1.23%, while 10-year Treasury yields rose 14 bps to 2.98%. Perhaps a harbinger of de-risking/deleveraging contagion gravitating from the “Periphery” to the “Core,” benchmark U.S. MBS yields jumped 32 bps to a six-week high 4.36%.

I don’t want to read too much into a single week. But as I’ve written previously, contemporary finance does not function well in a backdrop of rising yields, widening Credit spreads (increasing risk premiums) and surging CDS prices. Summer fun and games will be winding down soon. September will bring cooler temperatures, another Fed rate hike, and a ratcheting up of quantitative tightening. This Squeeze has only heightened fragilities – at home and abroad. I expect The Mirage of Liquidity Abundance to prove a summer phenomenon.

For the Week:

The S&P500 declined 1.2% (down 11.3% y-t-d), and the Dow slipped 0.2% (down 7.2%). The Utilities added 1.1% (up 7.4%). The Banks dropped 2.4% (down 15.2%), and the Broker/Dealers fell 2.3% (down 15.2%). The Transports lost 2.5% (down 10.4%). The S&P 400 Midcaps slumped 1.4% (down 9.3%), and the small cap Russell 2000 dropped 2.9% (down 12.8%). The Nasdaq100 stumbled 2.4% (down 18.9%). The Semiconductors dropped 3.7% (down 25.2%). The Biotechs fell 3.2% (down 11.4%). With bullion down $55, the HUI gold equities index sank 6.7% (down 22.8%).

Three-month Treasury bill rates ended the week at 2.5925%. Two-year government yields slipped a basis point to 3.24% (up 250bps y-t-d). Five-year T-note yields surged 14 bps to 3.09% (up 183bps). Ten-year Treasury yields rose 14 bps to 2.98% (up 146bps). Long bond yields gained 10 bps to 3.22% (up 131bps). Benchmark Fannie Mae MBS yields surged 32 bps to 4.36% (up 229bps).

Greek 10-year yields surged 46 bps to 3.69% (up 237bps). Spain’s 10-year yields jumped 29 bps to 2.39% (up 182bps). German bund yields rose 24 bps to 1.23% (up 141bps). French yields jumped 26 bps to 1.81% (up 161bps). The French to German 10-year bond spread widened two to 58 bps. U.K. 10-year gilt yields surged 30 bps to 2.41% (up 144bps). U.K.’s FTSE equities index added 0.7% (up 2.2% y-t-d).

Japan’s Nikkei Equities Index gained 1.3% (up 0.5% y-t-d). Japanese 10-year “JGB” yields added a basis point to 0.20% (up 13bps y-t-d). France’s CAC40 declined 0.9% (down 9.2%). The German DAX equities index dropped 1.8% (down 14.7%). Spain’s IBEX 35 equities index slipped 0.7% (down 4.3%). Italy’s FTSE MIB index fell 1.9% (down 17.3%). EM equities were mostly lower. Brazil’s Bovespa index declined 0.7% (up 6.4%), and Mexico’s Bolsa index slipped 0.8% (down 9.0%). South Korea’s Kospi index fell 1.4% (down 16.3%). India’s Sensex equities index added 0.3% (up 2.4%). China’s Shanghai Exchange Index declined 0.6% (down 10.5%). Turkey’s Borsa Istanbul National 100 index jumped 5.4% (up 62.6%). Russia’s MICEX equities index gained 2.2% (down 42.0%).

Investment-grade bond funds posted inflows of $3.485 billion, and junk bond funds reported positive flows of $1.464 billion (from Lipper).

Federal Reserve Credit last week declined $4.4bn to $8.837 TN. Fed Credit is down $63.8bn from the June 22nd peak. Over the past 153 weeks, Fed Credit expanded $5.110 TN, or 137%. Fed Credit inflated $6.026 Trillion, or 214%, over the past 510 weeks. Elsewhere, Fed holdings for foreign owners of Treasury, Agency Debt last week increased $3.3bn to a six-week high $3.381 TN. “Custody holdings” were down $121bn, or 3.5%, y-o-y.

Total money market fund assets declined $8.0bn to $4.568 TN. Total money funds were up $58bn, or 1.3%, y-o-y.

Total Commercial Paper rose $13.1bn to $1.190 TN. CP was up $51.7bn, or 4.5%, over the past year.

Freddie Mac 30-year fixed mortgage rates fell nine bps to 5.13% (up 227bps y-o-y). Fifteen-year rates dipped four bps to 4.55% (up 239bps). Five-year hybrid ARM rates declined four bps to 4.39% (up 196bps). Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates jumped 14 bps to 5.67% (up 264bps).

Currency Watch:

For the week, the U.S. Dollar Index jumped 2.4% to 108.17 (up 13.1% y-t-d). For the week on the downside, the South African rand declined 4.9%, the New Zealand dollar 4.0%, the Swedish krona 3.7%, the Australian dollar 3.5%, the Japanese yen 2.6%, the British pound 2.6%, the Norwegian krone 2.5%, the euro 2.2%, the Brazilian real 1.9%, the Swiss franc 1.8%, the South Korean won 1.8%, the Canadian dollar 1.6%, the Mexican peso 1.6%, and the Singapore dollar 1.5%. The Chinese (onshore) renminbi declined 1.10% versus the dollar (down 6.77% y-t-d).

Commodities Watch:

August 17 – Bloomberg (Eddie Spence and Ranjeetha Pakiam): “China’s gold imports from the major refining hub of Switzerland jumped to the highest in more than five years, signaling demand improved as the Asian nation relaxed strict Covid measures. One of the world’s top bullion buyers, China shipped in more than 80 tons from Switzerland in July… That’s more than double the previous month and eight times more than in May.”

The Bloomberg Commodities Index declined 0.7% (up 23.3% y-t-d). Spot Gold dropped 3.1% to $1,747 (down 4.5%). Silver sank 8.5% to $19.05 (down 18.3%). WTI crude declined $1.32 to $90.77 (up 21%). Gasoline dipped 0.9% (up 35%), while Natural Gas jumped 6.5% to $9.34 (up 150%). Copper was little changed (down 18%). Wheat dropped 6.3% (unchanged), and Corn fell 3.0% (up 5%). Bitcoin sank $2,880, or 11.9%, this week to $21,280 (down 54%).

Market Instability Watch:

August 18 – Wall Street Journal (Akane Otani): “The Federal Reserve says it is going to keep raising interest rates. Wall Street thinks it’s bluffing. This could spell trouble for both of them. Markets pummeled by the Fed’s rate increases in the first half of the year are racing upward. The S&P 500 is up 17% from its mid-June low. The yield on the 10-year U.S. Treasury note… is down more than half a percentage point from its June peak. Even battered cryptocurrencies have jumped. For many investors, the rebound reflects a belief that inflation has peaked, and expectation that the Fed will shift from raising rates to lowering them sometime next year. A parade of Fed officials has tried to push back. ‘There’s a disconnect between me and the markets,’ Minneapolis Fed President Neel Kashkari said last week.”

August 13 – Bloomberg (Denitsa Tsekova): “Stock bears are suddenly getting crushed. Once-dependable momentum trades are misfiring. Inflation-lashed bonds are bouncing back. After another expectations-busting week on Wall Street, sharp market reversals are baffling real-money veterans, retail speculators and quants alike. Big data surprises, including a blockbuster jobs report and a softer-than-expected July consumer price reading, have caught a heavily hedged investor base off guard, as the S&P 500 Index enjoys a nearly 17% rally from the June bear-market low. Economic angst and speculation that price pressures are peaking have helped global bonds climb almost 4% from their mid-June nadir, while once-hot stock shorts are backfiring. Put another way, every investing trend that defined the wild first-half is staging a messy reversal in the latest twist of this exhausting year.”

August 15 – Financial Times (Ian Johnston and Eric Platt): “One of the riskiest corners of global financial markets has made an unprecedented recovery in the past month, with prices of junk bonds rebounding as investors bet that the Federal Reserve’s efforts to tame inflation will avoid triggering a deep recession. The amount of US bonds trading at levels signalling severe investor concern has dropped rapidly over the past five weeks… Just 6.2% of high-yield bonds are now trading at distressed levels, compared with 11.6% on July 5, according to analysis by Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors.”

August 19 – Bloomberg (Farah Elbahrawy): “Investors continued piling into stocks and bonds, dismissing the risk of a more aggressive Federal Reserve as they expect it to ease the pace of rate hikes while inflation pulls back from its peak, according to Bank of America Corp. strategists. Global equity funds attracted $7.9 billion in the week through Aug. 17… US stocks saw a second week of inflows, with $9.2 billion pouring in. Global bonds had inflows of $500 million, driven by investment-grade debt, even as US Treasuries saw the biggest outflow since Sept. 2019. Meanwhile, $5 billion was pulled out of cash. ‘Very few fear Fed’ as more traders expect a policy pivot and as the meme-stock frenzy returns, Hartnett said.”

August 17 – Financial Times (David Sheppard and Derek Brower): “The global energy crisis deepened on Wednesday as a further rise in natural gas prices in Europe and the US threatened to push some of the world’s largest economies into recession. Gas markets in Europe jumped 6% on Wednesday to €236 a megawatt hour, taking the week’s gains so far to 14%. The latest price was equivalent in energy terms to almost $400 a barrel of oil, as traders raced to secure supplies ahead of the winter. Prices have more than doubled from already extremely elevated levels since June.”

Bursting Bubble and Mania Watch:

August 17 – Reuters (Saeed Azhar, Anirban Sen and Davide Barbuscia): “Top U.S. and European banks are facing tougher times in the riskiest parts of the loan market. The biggest U.S. lenders, including Bank of America and Citigroup, wrote down $1 billion in the second quarter on leveraged and bridge loans as rising interest rates made it tougher for banks to offload debt to investors and other lenders. The pain has also spread across the Atlantic, after European lenders such as Deutsche Bank and Credit Suisse reported losses for such exposure.”

August 17 – Bloomberg (Amina Niasse): “Matt Damon’s pitch to invest in crypto has disappeared from US television sets. Same goes for glitzy commercials starring LeBron James and Tom Brady. The drop in national TV marketing by the industry in the US has coincided with the selloff in Bitcoin and other crypto assets… Damon’s commercial for Crypto.com, which ends with him uttering ‘fortune favors the brave,’ last aired in February during the Super Bowl. The four-month national campaign cost an estimated $65 million…”

August 18 – Wall Street Journal (Matt Wirz): “Rising interest rates have brought highflying consumer lenders back to earth. Finance companies such as Upstart Holdings Inc. and Mosaic lend money to people for purchases such as cars, solar panels and home electronics. But they have to borrow the money they lend out to consumers—and that is becoming increasingly expensive as the Federal Reserve continues to raise interest rates aggressively. As borrowing costs for the companies rise, bad loans are going up too. With red-hot inflation pushing up prices for food and rent, more customers are starting to fall behind on payments.”

August 18 – Bloomberg (Malavika Kaur Makol and Divya Patil): “The lull in the Asian primary credit market extended for another week, with issuance dropping to its lowest since May. No deals in excess of $100 million concluded in the week ending Aug. 19, after just $453 million the week before… Debt sales have suffered globally this year in the face of red-hot inflation and aggressive policy tightening by central banks, despite a spate of US companies storming the market this week.”

Ukraine War Watch:

August 13 – New York Times (Marc Santora, Michael Schwirtz and Jack Nicas): “From spring into summer, the Ukrainian military was pummeled by Russian artillery in eastern Ukraine, steadily losing ground and as many as 200 soldiers a day in a mismatched, head-to-head contest. But in recent weeks, Ukraine has shifted its strategy with the help of new weaponry and succeeded, at least for now, in slowing Russia’s advances. Supplied with a growing arsenal of long-range Western weapons and aided by local fighters known as partisans, Ukraine has been able to hit Russian forces deep behind enemy lines, disrupting critical supply lines and, increasingly, striking targets that are key to Moscow’s combat potential.”

August 17 – Reuters (Ivan Lyubysh-Kirdey): “Ukrainian authorities performed disaster response drills on Wednesday following repeated shelling at the Russian-occupied Zaporizhzhia nuclear power plant, the largest of its kind in Europe. Both sides accuse the other of attacks in the vicinity of the facility in recent days and engaging in what they call ‘nuclear terrorism’. U.N. Secretary-General Antonio Guterres, who wants a demilitarised zone to be established around the plant to avoid a potential catastrophe, will meet Ukrainian President Volodymyr Zelenskiy and Turkish President Tayyip Erdogan on Thursday…”

August 19 – Bloomberg (Jonathan Tirone): “Diplomats concerned about an atomic accident at a war-damaged nuclear power plant in Ukraine should also turn their attention to a larger and looming danger, according to engineers who study critical infrastructure. Already only two of six reactors at the Zaporizhzhia Nuclear Power Plant are operating, potentially leaving Ukraine’s electricity grid facing collapse this winter, with the crisis spilling into neighboring European Union energy markets. Europe’s biggest atomic-energy station, Zaporizhzhia has in recent weeks been hit by shelling, with Ukraine and Russia blaming each other. Explosions wrecked infrastructure and cables critical for cooling atomic reactions and transmitting power.”

U.S./Russia/China Watch:

August 19 – Bloomberg (Faris Mokhtar): “Chinese President Xi Jinping and Russian leader Vladimir Putin are both planning to attend a Group of 20 summit in the resort island of Bali later this year, Indonesian President Joko Widodo said. ‘Xi Jinping will come. President Putin has also told me he will come,’ Jokowi, as the president is known, said… It was the first time the leader of the world’s fourth-most populous nation confirmed both of them were planning to show up at the November summit.”

August 15 – MarketWatch (Steve Goldstein): “‘We are at the edge of war with Russia and China on issues which we partly created, without any concept of how this is going to end or what it’s supposed to lead to.’ That’s the view of Henry Kissinger, the 99-year-old former secretary of state and national-security adviser… He recommended that the U.S. not ‘accelerate the tensions and to create options, and for that you have to have some purpose.’ Kissinger added that foreign policy is ‘very responsive to the emotion of the moment.’ He did say that, even if the U.S. played some role in triggering Russia, Ukraine now has to be treated like a NATO member, whether formally or not. On Taiwan, he advised being ‘very careful’ in measures that seem to change the structure of the relationship with China…”

August 15 – CNBC (Holly Ellyatt): “Russian President Vladimir Putin slammed the U.S. and wider West, claiming Tuesday that America wants to drag out the war in Ukraine. ‘The situation in Ukraine shows that the U.S. is trying to prolong this conflict,’ he said… Putin also claimed that the U.S. was trying to maintain its hegemonic status in the world and that the West wanted to extend its ‘bloc system’ of defense, such as the NATO military alliance, into Asia. ‘We also see that the collective West is seeking to extend its bloc system to the Asia-Pacific region similarly to NATO in Europe. For this purpose, bellicose military-political alliances are being formed, such as AUKUS and the others,’ Putin claimed…”

August 16 – Associated Press (Vladimir Isachenkov): “Russian President Vladimir Putin accused the United States of trying to encourage extended hostilities in Ukraine as part of what he described… as Washington’s alleged efforts to maintain its global hegemony. Addressing a security conference attended by military officials from Africa, Asia and Latin America, Putin reaffirmed his long-held claim that he sent troops into Ukraine in response to Washington turning the country into an ‘anti-Russia’ bulwark. ‘They need conflicts to retain their hegemony,’ Putin charged. ‘That’s why they have turned the Ukrainian people into cannon fodder. The situation in Ukraine shows that the United States is trying to drag the conflict out, and it acts in exactly the same way trying to fuel conflicts in Asia, Africa and Latin America.’”

August 17 – Reuters (Yew Lun Tian and Tony Munroe): “Chinese troops will travel to Russia to take part in joint military exercises led by the host and including India, Belarus, Mongolia, Tajikistan and other countries, China’s defence ministry said… China’s participation in the joint exercises was ‘unrelated to the current international and regional situation’, the ministry said… Last month, Moscow announced plans to hold ‘Vostok’ (East) exercises from Aug. 30 to Sept. 5, even as it wages a costly war in Ukraine.”

August 17 – Wall Street Journal (James T. Areddy and Ann M. Simmons): “The People’s Liberation Army of China said it would join military exercises led by Russia in the latest demonstration of partnership between the two U.S. rivals. Building on a ‘no limits’ pact their presidents signed this year, the Russian and Chinese militaries will drill side-by-side starting later this month in the Russian Far East, according to China’s Ministry of Defense. The exercises will mark their second joint show of force in the region this year after bombers from each country in May conducted a 13-hour drill close enough to Japan and South Korea that those nations scrambled jet fighters, as President Biden was visiting Tokyo.”

China/Taiwan/U.S. Watch:

August 17 – Bloomberg (Iain Marlow and Rebecca Choong Wilkins): “China called on the US to refrain from sailing naval vessels through the Taiwan Strait, saying Beijing would take further action in the wake of House Speaker Nancy Pelosi’s visit to Taipei. China’s ambassador to Washington, Qin Gang, said… China viewed such Taiwan transits as an escalation by the US and an effort to support the ‘separatist’ government in Taipei… ‘The US side has done too much and going too far in this region,’ Qin said in response to a question about potential naval patrols. ‘I do call on our American colleagues to refrain, to exercise restraint, not to do anything to escalate the tension. So if there’s any moves damaging China’s territorial integrity and sovereignty, so China will respond. China will respond.’”

August 16 – Wall Street Journal (Paul Beckett): “China’s ambassador to the U.S. accused Washington of escalating the current crisis over Taiwan, in the latest round of official objections from Beijing to the recent visits by House Speaker Nancy Pelosi and other lawmakers to the island. ‘Some Americans do not recognize and correct their mistakes,’ Ambassador Qin Gang said… ‘The U.S. side took the first step to provoke China on the Taiwan question,’ he said, adding that the visit of Mrs. Pelosi and a subsequent delegation that included Sen. Ed Markey ‘greatly infringed on China’s sovereignty.’”

August 15 – Financial Times (Kathrin Hille): “China announced a fresh round of military manoeuvres around Taiwan in reaction to the visit of a US congressional delegation, a move that ratchets up Beijing’s efforts to isolate the island nation. ‘This is a stern deterrence measure against the US and Taiwan continuing to play political tricks and undermining peace and stability across the Taiwan Strait,’ a Chinese military official said. The announcement came after Democratic senator Ed Markey and four members of the US House of Representatives from both sides of the aisle landed in Taiwan on Sunday night and met president Tsai Ing-wen… The Chinese defence ministry said the visit flagrantly violated previous agreements and China’s sovereignty and territorial integrity.”

August 14 – Financial Times (Mercedes Ruehl): “The US and China displayed their military strength in Indonesia and Thailand by holding war games over the weekend, as the rival superpowers worked to strengthen their influence in south-east Asia. China dispatched fighter jets to Thailand on Sunday in a joint air force exercise called Falcon Strike 2022 that Beijing’s defence ministry said would ‘enhance mutual trust and friendship’. The Thailand exercises coincided with the conclusion of two weeks of war games between the US and Indonesia, marking the largest version of the annual Garuda Shield live-fire drills since starting in 2009. Japan, Australia and Singapore also joined for the first time.”

Economic War/Iron Curtain Watch:

August 16 – Reuters (Ben Blanchard): “Peace and stability in the Taiwan Strait is critical to the stability of the global supply chain of high-tech products, Taiwan President Tsai Ing-wen told a Japanese publication…”

August 16 – Financial Times (Edward White, Tom Mitchell, Kana Inagaki and Hudson Lockett): “Multinational companies are drawing up contingency plans in the event of a US-China military conflict after Beijing launched an unprecedented series of exercises around Taiwan this month. The intensified planning by business leaders in the US, Europe, Japan and elsewhere is a signal that investors in China no longer consider an invasion of Taiwan to be merely a low probability ‘black swan’ risk… ‘There’s a lot of scenario thinking going on . . . all the way to: ‘What shall we do in case there is a war? Should we close our China operations? How can we sustain our business and overcome possible blockades?’’ said Jörg Wuttke, head of the EU Chamber of Commerce in China.”

August 18 – Associated Press (Johnson Lai and Joe McDonald): “The U.S. government will hold trade talks with Taiwan in a sign of support for the island democracy that China claims as its own territory, prompting Beijing to warn Thursday it will take action if necessary to ‘safeguard its sovereignty.’ The announcement of trade talks comes after Beijing fired missiles into the sea to intimidate Taiwan… Chinese President Xi Jinping’s government criticized the planned talks as a violation of its stance that Taiwan has no right to foreign relations. It warned Washington not to encourage the island to try to make its de facto independence permanent, a step Beijing says would lead to war. ‘China firmly opposes this,’ Ministry of Commerce spokesperson Shu Jueting said. She called on Washington to ‘fully respect China’s core interests.’”

Inflation Watch:

August 19 – Wall Street Journal (Rina Torchinsky): “The cost of raising a child through high school has risen to more than $300,000 because of inflation that is running close to a four-decade high, according to a Brookings Institution estimate. It determined that a married, middle-income couple with two children would spend $310,605—or an average of $18,271 a year—to raise their younger child born in 2015 through age 17.”

August 17 – Reuters (Gigi Zamora): “Teachers face a harsh lesson as inflation drives up the cost of everything from paper to pencils before the school year begins, leading some to cut back on supplies – or substitute with cheaper items. ‘If you ask any teacher, Ticonderoga pencils are it,’ said Kristina Eisenhower, 35, an instructional facilitator. Yet a 12-pack of that popular brandcosts $3.99, up nearly 25% from a year ago… Folders and binders cost 17% more than a year ago, according to data from analytics firm NielsenIQ. Prices are up 23% for graph paper, 8% for scissors, and 28% for book covers.”

August 17 – Bloomberg (Gerson Freitas Jr.): “Natural gas prices are flirting with levels not seen in the US in almost 15 years amid mounting concerns that robust domestic and overseas demand for the fuel will siphon off supplies that otherwise would be stowed for winter. So much North American gas is feeding power plants to run air conditioners that stockpiles relied upon during the coldest months to augment pipelined supplies are still more than 10% below normal levels. Add to that expectations that amassing reserves will get even more challenging when a key gas-export complex on the Texas coast resumes operations in October.”

August 16 – Wall Street Journal (Ryan Dezember): “Southwestern cotton growers are abandoning millions of parched acres that they planted in spring, prompting forecasts for the weakest U.S. harvest in more than a decade and sending prices sharply higher. U.S. agricultural forecasters expect drought-struck farmers to walk away from more than 40% of the 12.5 million acres they sowed with cotton and harvest the smallest area since Reconstruction. Back then, in 1868, yields per acre were less than a fifth of what they are today, but the market for cotton was vastly smaller too.”

August 16 – Bloomberg (Kim Chipman and Mark Chediak): “Arizona, which grows most of the lettuce eaten in the US each winter, will be losing about a fifth of the water it gets from the Colorado River as drought and climate change diminish the key water basin. The US will withhold 21% of Arizona’s annual water allocation from the Colorado River in 2023 as part of conservation efforts announced Tuesday by the Interior Department’s Bureau of Reclamation.”

Biden Administration Watch:

August 18 – Reuters (Ben Blanchard and Eduardo Baptista): “The United States and Taiwan have agreed to start trade talks under a new initiative to reach agreements with ‘economically meaningful outcomes’, with a Taiwan official saying China’s ‘economic coercion’ would also be discussed. Washington and Taipei unveiled the U.S.-Taiwan Initiative on 21st-Century Trade in June, just days after the Biden administration excluded the Chinese-claimed island from its Asia-focused economic plan designed to counter China’s growing influence. The office of the U.S. Trade Representative said the two sides had ‘reached consensus on the negotiating mandate’ and it was expected that the first round of talks would take place early this autumn. ‘We plan to pursue an ambitious schedule for achieving high-standard commitments and meaningful outcomes covering the eleven trade areas in the negotiating mandate that will help build a fairer, more prosperous and resilient 21st-century economy,’ Deputy United States Trade Representative Sarah Bianchi said…”

Federal Reserve Watch:

August 16 – Financial Times (Gary Silverman): “Forty years ago today, former Salomon Brothers economist Henry Kaufman helped start one of history’s great bull markets. Known then as ‘Dr Doom’ for his bearish views, he roused investors by changing his stance and forecasting a fall in interest rates after a punishing Federal Reserve campaign to tame inflation… He fears that today’s Fed under Jay Powell is failing to combat inflation with the resolve displayed by Paul Volcker, who aggressively raised interest rates while leading the central bank in the 1970s and 1980s. ‘I am still waiting for him to act boldly — ‘boldly’ means he has to shock the market,’ Kaufman said of Powell. ‘If you want to change someone’s view, if you want to change someone’s action, you can’t slap them on the hand, you have to hit them in the face.’”

August 17 – Associated Press (Paul Wiseman): “Federal Reserve officials saw signs that the U.S. economy was weakening at their last meeting but still called inflation ‘unacceptably high’ before raising their benchmark interest rate by a sizable three-quarters of a point in their drive to slow spiking prices. In minutes from their July 26-27 meeting…, the policymakers said they expected the economy to expand in the second half of 2022. But many of them suggested that growth would weaken as higher rates take hold. The officials noted that the housing market, consumer spending, business investment and factory production had decelerated after having expanded robustly in 2021. Slower growth, they noted, could ‘set the stage’ for inflation to gradually fall to the central bank’s 2% annual goal…”

August 17 – Wall Street Journal (Nick Timiraos): “Federal Reserve officials agreed at their monetary-policy meeting last month they needed to keep raising interest rates enough to lower inflation, but signaled greater caution with the pace of coming increases. The central bank has raised rates this year at its fastest pace since the 1980s. Minutes from the Fed’s July 26-27 policy meeting… showed officials were sensitive to two opposing risks as they weighed how and when to slow those increases. The first concern, which the minutes described as significant, is that they might need to raise rates more than currently anticipated if price pressures have spread more broadly through the economy. But officials, for the first time, acknowledged they might also raise borrowing costs more than needed—causing unwarranted economic weakness, because of the delay between when borrowing costs go up and when that is reflected in economic activity.”

August 18 – Bloomberg (Matthew Boesler, Zoe Schneeweiss and María Paula Mijares Torres): “US central bankers offered divergent signals over the size of the next interest-rate hike, with St. Louis’s James Bullard urging another 75 basis-point move while Kansas City’s Esther George struck a more cautious tone. Bullard, who is one of the most hawkish policy makers at the US central bank, told the Wall Street Journal… he favored going big again, arguing ‘we should continue to move expeditiously to a level of the policy rate that will put significant downward pressure on inflation.’ ‘I don’t really see why you want to drag out interest rate increases into next year,’ he said.”

August 18 – Reuters (Ann Saphir): “Minneapolis Federal Reserve Bank President Neel Kashkari… said the U.S. central bank needs to get ‘very very’ high inflation down as soon as possible, even at the cost of possibly triggering a recession. ‘We need to get inflation down urgently,’ Kashkari said… ‘We need to get demand down’ by raising interest rates. Economic fundamentals are strong, he said, but whether the Fed can lower inflation without sending the economy into a recession, he said, ‘I don’t know.’”

U.S. Bubble Watch:

August 18 – Reuters (Lucia Mutikani): “The number of Americans filing new claims for unemployment benefits fell last week and data for the prior period was revised sharply down, suggesting labor market conditions remain tight, though higher interest rates are slowing momentum… Initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 250,000 for the week ended Aug. 13. Data for the prior week was revised to show 10,000 fewer claims filed than previously reported.”

August 17 – CNBC (Jeff Cox): “Retail activity was flat in July as falling fuel prices held back gas station sales and consumers turned more heavily to online shopping… While advance retail sales were unchanged, total receipts excluding autos rose 0.4%. Economists… had been looking for a 0.1% increase in the top-line number and a flat total ex-autos. June’s gain was revised down to 0.8% from 1%. Retail and food sales excluding gasoline and autos rose 0.7% from a month ago… ‘People appear to have used some of the savings from lower gas prices to spend more on other items, both in nominal and — very likely — real terms,’ wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.”

August 18 – CNBC (Diana Olick): “Sales of previously owned homes fell nearly 6% in July compared with June… The sales count declined to a seasonally adjusted annualized rate of 4.81 million units… It is the slowest sales pace since November 2015, with the exception of a brief plunge at the beginning of the Covid pandemic. Sales fell about 20% from the same month a year ago… Homebuyers are also still contending with tight supply. There were 1.31 million homes for sale at the end of July, unchanged from July 2021. At the current sales pace, that represents a 3.3-month supply… The median price of a home sold in July was $403,800, an increase of 10.8% year over year… First-time buyers represented just 29% of buyers in July. Historically they usually make up about 40% of sales, but they are clearly struggling the most with affordability. High rents are also making it harder for them to save for a down payment. Even as sales slow, this is still a fast-moving market. A typical home in July went under contract in just 14 days, which matches the fastest ever recorded in June.”

August 16 – Wall Street Journal (Lucia Mutikani): “U.S. homebuilding fell to the lowest level in nearly 1-1/2 years in July, weighed down by higher mortgage rates and prices for construction materials… Housing starts plunged 9.6% to a seasonally adjusted annual rate of 1.446 million units last month, the lowest level since February 2021. Data for June was revised slightly higher to a rate of 1.599 million units from the previously reported 1.559 million units. Economists… had forecast starts would decline to a rate of 1.540 million units.”

August 15 – Reuters (Lindsay Dunsmuir): “U.S. single-family homebuilders’ confidence and New York state factory activity fell in August to their lowest levels since near the start of the COVID pandemic, a further sign the economy is softening as the Federal Reserve raises interest rates. The National Association of Home Builders/Wells Fargo Housing Market Index fell 6 points to 49 this month, the eighth consecutive monthly decline and the lowest reading outside of the pandemic era since 2014…”

August 16 – CNBC (Diana Olick): “Rising costs and falling confidence in the U.S. economy are fast becoming a toxic cocktail for the housing market. As a result, a growing number of buyers are backing out of deals they’ve made with homebuilders and sellers of existing homes. Homebuilder cancellation rates have more than doubled since April, according to surveys by John Burns Real Estate Consulting. In July, 17.6% of builder contracts fell through, compared with 8% in April and 7.5% in July 2021.”

August 17 – CNBC (Diana Olick): “Mortgage rates fell slightly last week, but not enough to fuel any kind of recovery in consumer demand for home loans… Applications for a mortgage to purchase a home dropped 1% for the week and were 18% lower than the same week one year ago. Potential homebuyers are not only grappling with higher interest rates but with inflation in the overall economy and concern that home values will start to fall.”

Fixed Income Watch:

August 17 – Bloomberg (Jack Pitcher): “High-grade US companies are forecast to be big borrowers next month if rates remain steady, even after selling more debt than expected in August. Capitalizing on tighter spreads and lower yields, US companies issued more than $100 billion of investment-grade bonds this month through Tuesday — only the third time August supply has hit that level. Total supply in 2022 stands at $905 billion, 6% off last year’s pace.”

China Watch:

August 16 – Bloomberg: “China’s surprise policy easing is a double-edged sword for the nation’s sovereign bond market. On the bright side, it creates opportunities for capital gains for investors who foresee more easing and suggests China is a reliable destination for diversification. On the other hand, persistently loose policy could deepen the country’s interest-rate discount to the US, complicating the picture of capital flows. Overseas funds bought 3.3 billion yuan ($486 million) of onshore sovereign notes last month, chalking up the first inflows since January… While that was only a fraction of the 199-billion-yuan selloff seen in the five months through June, it was a sign that foreigners had finally gotten over geopolitical tensions… and widening monetary policy gap with the Federal Reserve.”

August 16 – Bloomberg: “China’s Premier Li Keqiang asked local officials from six key provinces that account for about 40% of the country’s economy to bolster pro-growth measures after data for July showed consumption and output grew slower than expectations due to Covid lockdowns and the ongoing property slump. Li told officials… to take the lead in helping boost consumption and offer more fiscal support via government bond issuance for investments… He also vowed to ‘reasonably’ step up policy support to stabilize employment, prices and ensure economic growth.”

August 17 – Bloomberg: “China’s state media said local governments could sell more than $229 billion of bonds to fund infrastructure investment and plug budget gaps, a further move by Beijing to shore up an economy… The reports came alongside a raft of bad economic news this week: Covid cases reached a three-month high, suggesting more lockdowns are likely; real-time data indicated property sales continued to fall this month; weak economic data on Monday signaled a slump in domestic spending; and heat waves caused energy shortages in several provinces, forcing some factory shutdowns. Economists are turning even more bearish, with Goldman Sachs… lowering its projection for gross domestic product growth to 3% from 3.3% while Nomura… slashed its forecast to 2.8% from 3.3%.”

August 15 – Bloomberg: “Anna Luan is worried about the future. The Shanghai internet business where she works hasn’t paid her salary in full since April, when city authorities instituted a strict lockdown to contain the spread of Covid-19. Luckily the 30-year-old had built up savings through the pandemic… She’s also used some of that money to pay off 200,000 yuan ($29,530) in mortgage debt on the two homes she owns in her hometown of Changzhou. ‘So many companies are laying off people and cutting pay,’ Luan says. ‘Now I just want to save any spare cash I have and don’t even dare to spend.’ Recent surveys show Chinese households are more pessimistic about future income growth than they’ve ever been—even at the pandemic’s start in 2020 or after the global financial crisis.”

August 17 – New York Times (Daisuke Wakabayashi): “In a rare act of defiance, people across the country who bought property from indebted developers are refusing to repay loans on their unfinished apartments. For decades, buying property was considered a safe investment in China. Now, instead of building a foundation of wealth for the country’s middle class, real estate has become a source of discontent and anger. In more than 100 cities across China, hundreds of thousands of Chinese homeowners are banding together and refusing to repay loans on unfinished properties, one of the most widespread acts of public defiance in a country where even minor protests are quelled. The boycotts are part of the fallout from a worsening Chinese economy, slowed by Covid lockdowns, travel restrictions and wavering confidence in the government.”

August 17 – Bloomberg: “The slump in China’s fiscal income narrowed in July although the ongoing property downturn continued to weigh on revenue from land sales and taxes. General public revenue in the first seven months of this year was 12.5 trillion yuan ($1.8 trillion), 9.2% less than a year ago… That was an improvement from the 10.2% fall in the first half of the year…”

August 14 – Bloomberg: “China’s home prices fell for an 11th month in July, underscoring how government relief efforts are failing to curb the country’s spiraling real estate crisis. New home prices in 70 cities, excluding state-subsidized housing, declined 0.11% from June, when they sank 0.1%… Existing-home prices fell 0.21%, the same as a month earlier.”

August 17 – Financial Times (Gary Jones and Edward White): “Chinese property developer Country Garden estimated that first-half profits fell as much as 70% in the first half of the year, as the country’s largest real estate group by sales was drawn into a crisis that has raged through the heavily indebted sector. The company… said core profit was between about Rmb4.5bn and Rmb5bn ($6634mn and $736mn) in the first six months of 2022, down from Rmb15.2bn a year earlier.”

August 16 – Bloomberg (Lorretta Chen): “Fitch Ratings downgraded Country Garden Holdings Co. to junk territory…, as China’s largest builder by contracted sales loses its last investment-grade rating amid the sector’s cash crunch and sales slump. The firm’s ‘liquidity buffer, while adequate, is under pressure’ from to declining sales, working capital commitments and deteriorated access to capital markets, the ratings firm said while dropping its grade a notch to BB+.”

August 16 – Reuters (Clare Jim): “China will guarantee new onshore bond issues by a few select private developers to support its embattled property sector, sources said…, while the state planner said it would boost economic demand and speed up infrastructure projects. News of the planned state support for some better-quality private developers saw the Hang Seng mainland properties sub-index rise by as much as 10% at one point… Policymakers have been trying to stabilize the sector that accounts for a quarter of the national GDP after a string of defaults among developers and a slump in home sales.”

August 16 – Bloomberg: “China Huarong Asset Management Co.’s shares and bonds plunged after the bad-debt manager said it expected a net loss of 18.88 billion yuan ($2.78bn) in the first half of the year as credit impairments surged… Smaller rival China Great Wall Asset Management Co. missed a second deadline at the end of June to publish its 2021 annual report, while China Cinda Asset Management warned in July that net income may drop between 30% to 35% in the first half, renewing investor concerns about the health of the $730 billion industry.”

August 16 – Financial Times (Cheng Leng): “China Huarong Asset Management, the country’s largest distressed debt investor, has issued a profit warning on surging credit impairments and property market jitters less than a year after a $6.6bn state-led restructuring. Credit impairment losses ‘increased significantly’ in the first six months of the year, Huarong said…, as it warned of a net loss of Rmb18.9bn ($2.8bn) for the first half of 2022. The company attributed the loss to the ‘impact of volatility in the capital market and downturn in the real estate market’, adding that the recurrence of Covid-19 cases, geopolitical conflicts and pressure on the economy were also to blame. Huarong, one of China’s ‘Big Four’ asset management companies, needed a government-orchestrated bailout last year after delaying disclosure of a $16bn loss for months.”

August 16 – Associated Press: “Unusually high temperatures and a prolonged drought are affecting large swaths of China, reducing crop yields and drinking water supplies. The lack of rain has been especially marked in the southwestern megacity of Chongqing, which encompasses a large area of mountains and rivers. State media… reported fire trucks were delivering water to outlying villages for drinking and irrigating crops. Rainfall in Chongqing has been half of what is usually expected for the year and some smaller waterways have dried up entirely.”

August 17 – Reuters (David Stanway): “China is scrambling to alleviate power shortages and bring more water to the drought-hit basin of the Yangtze river as it battles a record-breaking heatwave by deploying relief funds, seeding clouds and developing new sources of supply. For more than two months, baking temperatures have disrupted crop growth, threatened livestock and forced industries in the hydropower-dependent regions of the southwest to shut down so as to ensure electricity supplies for homes. China has repeatedly warned that it faces a proliferation of extreme weather events in coming years as it tries to adapt to climate change and rises in temperature that are likely to be more severe than elsewhere.”

August 18 – Financial Times (Primrose Riordan and Gloria Li): “China will offer assistance to coal plants to maintain electricity supplies as demand for the fuel surges in the wake of extreme heat and droughts in the south-west of the country. A months-long heatwave and a lack of rain have starved dams of water in Sichuan, a province of 80mn which mostly relies on hydropower… China’s vice-premier Han Zheng said… Beijing would provide support for coal after the planning ministry said daily consumption of the fuel by the country’s power plants was up 15% in the first two weeks of August compared with the same period last year. ‘[We need to] guarantee safe electricity supply for the people . . . and key sectors,’ he said… The government will ‘enhance policy support [and] take multiple measures to help coal plants ease actual difficulties’, he added…”

August 17 – Bloomberg: “Toyota… and Contemporary Amperex Technology Co., the world’s top battery maker, are closing plants in China’s Sichuan province as a drought-induced power crisis worsens. Sichuan, one of China’s most populous provinces, is highly reliant on hydropower. That makes it particularly vulnerable to a heat wave and drought that’s pushing up air-conditioning demand and drying up reservoirs behind hydro dams. It’s a key manufacturing hub and is also important for the production of materials including polysilicon and lithium that are vital to the energy transition.”

August 19 – Associated Press (Mark Schiefelbein): “Ships crept down the middle of the Yangtze on Friday after China’s driest summer in six decades left one of the mightiest rivers barely half its normal width and set off a scramble to contain the damage to a weak economy in a politically sensitive year. Factories in Sichuan province and the adjacent metropolis of Chongqing in the southwest were ordered to shut down after reservoirs that supply hydropower fell to half their normal levels and demand for air conditioning surged in scorching temperatures.”

August 17 – Bloomberg (Linda Lew and Jinshan Hong): “China’s Covid cases surged to a three-month high, driven by a worsening outbreak in the tropical Hainan province that has become the country’s biggest since Shanghai was shut down in the spring. The rising number of infections also caused alarm elsewhere, with hundreds of vehicles stuck on a state highway in Tibet after a neighboring province refused to allow more travelers from the hard-hit region to enter.”

Central Banker Watch:

August 18 – Reuters (David Milliken): “The Bank of England set out plans… to auction off around 200 million pounds ($241 million) of corporate bonds a week from next month, as it moves ahead with its plans to unwind its huge stimulus push of recent years. The BoE bought nearly 20 billion pounds of investment-grade bonds from non-financial companies under its quantitative easing programme…”

August 17 – Reuters (Lucy Craymer): “New Zealand’s central bank… delivered its seventh straight interest rate hike and signalled a more hawkish tightening path over coming months to rein in stubbornly high inflation. The aggressive tone of the Reserve Bank of New Zealand’s (RBNZ) statement warning of future hikes being brought forward caught some traders by surprise, lifting the local dollar and sending swap rates higher. The RBNZ raised the official cash rate (OCR) by 50 bps to 3.0% as expected, a level not seen since September 2015, and crucially, it now sees rates at 4.0% by early next year, compared to a previous projection of 3.7%.”

Global Bubble and Instability Watch:

August 18 – Bloomberg (Christopher Anstey): “Former Treasury Secretary Lawrence Summers said that predictions for the size of China’s economy to exceed that of the US have parallels to failed historical calls for Japan and Russia to do the same thing… ‘People are going to look back at some of the economic forecasts about China in 2020 in the same way they looked back at economic forecasts for Russia that were made in 1960 or for Japan that were made in 1990,’ said Summers…”

August 16 – Financial Times (Richard Waters): “After dealing with booming demand and global shortages since the start of the pandemic, the semiconductor industry is facing a sudden downturn. But even for an industry accustomed to frequent cyclical slumps, this one has defied easy analysis and left researchers struggling to predict how the setback will play out. The sudden glut in memory chips, PC processors and some other semiconductors has come at a time when manufacturers in many automotive and industrial markets still lack a reliable supply of chips.”

August 17 – Reuters (Wayne Cole): “Australia’s jobless rate dropped to a fresh 48-year low in July even as employment broke a super-strong run with the first fall this year… Figures from the Australian Bureau of Statistics… showed the jobless rate dipped to 3.4%… That was the lowest rate since August 1974 and only added to evidence the labour market was drum-tight.”

Europe Watch:

August 16 – Wall Street Journal (Joe Wallace): “Natural-gas prices in Europe closed at a new record Tuesday, with hot summer weather boosting fuel demand and Russia throttling back supplies… Fearing President Vladimir Putin will order a full cutoff, the European Union has embarked on a plan to conserve gas now to burn it over the winter. In the U.S., where exports to Europe have helped keep domestic supplies lean, natural-gas futures climbed Tuesday to end at $9.329 per million British thermal units, the highest price in 14 years and 150% more than a year ago.”

August 19 – Reuters (Miranda Murray and Paul Carrel): “German producer prices jumped at the fastest pace on record in July, underscoring the gloomy outlook for Europe’s largest economy… Producer prices… surged 37.2% on the year, the biggest rise since records began in 1949… The month-on-month rise, 5.3%, was also the highest on record.”

August 16 – Financial Times (Martin Arnold): “Investors are now more pessimistic about the German economy than they have been at any time since the eurozone debt crisis more than a decade ago, worrying that a sharp fall in Russian natural gas supplies and soaring energy prices will plunge the country into recession. The ZEW Institute’s gauge of investor expectations about Europe’s largest economy has sunk to its lowest level since 2011, dropping from minus 53.8 to minus 55.3…”

August 18 – Reuters (David Milliken): “British households are feeling ‘a sense of exasperation’ about the surging cost of living which has pushed consumer sentiment to its lowest since at least 1974, according to the country’s longest-running survey of household finances. The GfK consumer sentiment index sank to a record-low -44 in August from July’s reading of -41, which was already the lowest since the survey began.”

August 17 – CNN (Mark Thompson): “Inflation in the United Kingdom hit a new 40-year high last month, rising above 10% for the first time since 1982 and piling further pain on households already struggling to pay their bills. Annual consumer price inflation hit 10.1% in July…, up from 9.4% in June. Soaring food prices — up 12.7% since July 2021 — were the largest single contributor to the acceleration in inflation, the ONS said.”

August 13 – Guardian (John Henley): “In places, the Loire can now be crossed on foot; France’s longest river has never flowed so slowly. The Rhine is fast becoming impassable to barge traffic. In Italy, the Po is 2 metres lower than normal, crippling crops. Serbia is dredging the Danube. Across Europe, drought is reducing once-mighty rivers to trickles, with potentially dramatic consequences for industry, freight, energy and food production – just as supply shortages and price rises due to Russia’s invasion of Ukraine bite.”

EM Crisis Watch:

August 17 – Bloomberg (Srinivasan Sivabalan, Karl Lester M. Yap and Ruth Carson): “The US dollar’s relentless climb higher is blowing a hole in the finances of developing nations. Policy makers in these countries are, collectively, burning through the equivalent of more than $2 billion of foreign reserves every weekday in an attempt to prop up their currencies against the dollar. In total this year, they’ve drained reserves — the emergency stash they hold to fend off severe economic crises — by $379 billion. In a sign, though, of just how powerful the forces are driving the dollar higher, and of how perilous the current moment is, these efforts have done little to stabilize foreign-exchange markets in the most vulnerable countries. From Ghana to Pakistan to Chile, currencies have plunged to record lows, exacerbating spikes in inflation, deepening poverty and fanning unrest… Worldwide, 36 currencies have lost at least a 10th of their value this year.”

August 18 – CNBC (Natasha Turak and Matt Clinch): “Turkey’s central bank shocked markets Thursday with a cut to its benchmark policy rate, despite inflation in the country sitting near 80%… The country’s main policy rate, which had been at 14% for the last seven months, was cut to 13% in a complete mismatch to what other central banks are doing around the world. ‘Another idiotic move,’ commented Timothy Ash, a senior emerging markets strategist at BlueBay Asset Management. ‘Insane with inflation at 80% and still rising the CBRT cuts rates, against expectations by 100bps to just 13%,’ he wrote… ‘Ridiculous move. Obviously they have got cash in their pockets from Russia and the Gulf and think they can cut rates + hold the Lira.’”

Japan Watch:

August 18 – Reuters (Tetsushi Kajimoto and Leika Kihara): “Japan’s core consumer inflation accelerated in July to its fastest in seven-and-a-half years, driven by fuel and raw material prices and adding to the costs of living for households yet to see significant wage gains… The core consumer price index (CPI)… rose 2.4% in July from a year earlier, matching a median market forecast… That followed a 2.2% gain in June and marked the fastest pace since December 2014…”

August 15 – Reuters (Leika Kihara and Tetsushi Kajimoto): “Japan’s economy rebounded at a slower-than-expected pace in the second quarter from a COVID-induced slump… The world’s third-largest economy expanded an annualised 2.2% in April-June, government data showed, marking the third straight quarter of increase but falling short of median market forecasts for a 2.5% gain.”

Social, Political, Environmental, Cybersecurity Instability Watch:

August 16 – Associated Press (Sam Metz, Suman Naishadham and Kathleen Ronayne): “For the second year in a row, Arizona and Nevada will face cuts in the amount of water they can draw from the Colorado River as the West endures more drought… Though the cuts will not result in any immediate new restrictions — like banning lawn watering or car washing — they signal that unpopular decisions about how to reduce consumption are on the horizon, including whether to prioritize growing cities or agricultural areas. Mexico will also face cuts. But those reductions represent just a fraction of the potential pain to come for the 40 million Americans in seven states that rely on the river. Because the states failed to meet a federal deadline to figure out how to cut their water use by at least 15%, they could see even deeper cuts…”

August 17 – Reuters (Brendan O’Brien and Scott Disavino): “California’s grid operator urged the state’s 40 million people to ratchet down the use of electricity in homes and businesses on Wednesday as a wave of extreme heat settled over much of the state, stretching power supplies to breaking point. Temperatures soared well above 100 Fahrenheit (38 Celsius) in many of the inland valleys, reaching 107 F (42 C) in parts of Northern California’s Shasta and Tehama counties and 108 F (42 C) in Southern California’s Imperial County on the Mexican border.”

August 12 – CNBC (Nathaniel Lee): “Blackouts are growing more frequent in the United States. The average American experienced just over eight hours of power outages in 2020, with overall duration of power interruptions in the U.S. more than doubling since 2015, according to the U.S. Department of Energy. ‘This is not because the grid has changed, but because there is so much greater threat from extreme weather,’ said Alison Silverstein, an independent consultant at the American Council for an Energy-Efficient Economy. ‘And the number of extreme weather events of every kind have increased significantly over the last decade, in particular.’”

August 14 – Reuters (Kate Duguid and Aime Williams): “A quarter of the US land area, home to more than 100mn people, will be subjected to temperatures of more than 125F (52C) in three decades, including states with rapid population growth such as Texas, a report forecasts. The ‘extreme heat belt’, in which heat indices exceed such temperatures, will expand from 50 counties in 2023 to more than 1,000 by 2053, according to a new report from First Street Foundation, a… non-profit climate risk research group. The findings point to an increasingly severe impact on US population centres and property markets as the planet is warmed by greenhouse gas emissions. Temperatures have risen 1.1C globally since preindustrial times.”

August 18 – Reuters (Lucy Craymer): “Torrential rain slammed the west and north of New Zealand’s South Island for a third straight day on Thursday, forcing hundreds to evacuate their homes and triggering road and school closures and land slips. Coming on top of weeks of damp weather, the latest rainstorms are worsening conditions in New Zealand’s already sodden landscape. Experts have attributed the unseasonably wet weather to a narrow stream of water vapour, or an ‘atmospheric river’, sitting above the country.”

Levered Speculation Watch:

August 17 – Financial Times (Eric Platt): “Quant funds are increasing their bets on US stocks, helping fuel a sharp rally that has added $7tn in value to markets since June even as economic data point to a slowdown in the world’s largest economy. In many cases, the funds — which look for trends in the market and then attempt to ride the momentum — have quickly unwound positions taken in late 2021 and earlier this year that were structured to benefit from falling stock markets. As they have closed out those bearish bets, they have helped push stock prices higher — and then followed the new trend by making fresh wagers that benefit from the rally. Charlie McElligott, a strategist at Nomura, said quant funds ‘moved fast and unemotionally’ to shift their stance, catching ‘a very bearish market . . . very flat-footed’. These funds have spent tens of billions of dollars on futures, helping push the benchmark S&P 500 and tech-heavy Nasdaq Composite up double-digits from recent lows…”

Geopolitical Watch:

August 18 – Reuters (Ben Blanchard and Martin Quin Pollard): “China’s efforts to coerce and undermine Taiwan risk miscalculation and its pressure campaign will most likely continue, Daniel Kritenbrink, the top U.S. diplomat for East Asia, said. China, which claims Taiwan as its territory, has been carrying out war games and military drills around the island this month to show its anger at a visit to Taipei by U.S. House Speaker Nancy Pelosi… Kritenbrink, the assistant secretary of state for the Bureau of East Asian and Pacific Affairs, said China had used Pelosi’s trip as an excuse to change the status quo, jeopardising peace.”

August 18 – Reuters: “Russia’s Defence Ministry said… three MiG-31E warplanes equipped with Kinzhal hypersonic missiles have been relocated to its Kaliningrad region… Russian state-owned news agency RIA cited the ministry as saying that the MiG jets would be on round-the-clock duty. Kaliningrad, a Russian Baltic coast exclave located between NATO and European Union members Poland and Lithuania, became a flashpoint after Lithuania moved to limit goods transit to the region through its territory, with Russia promising retaliation.”

August 15 – Reuters (Isabel Reynolds): “The US and its two top Asian allies announced they had conducted a joint missile defense exercise off Hawaii, raising the profile of exercises that show their willingness to work together in the face of threats posed by North Korea and China.”

August 16 – Reuters (Mark Trevelyan): “President Vladimir Putin said… Russia was ready to sell advanced weapons to allies globally and cooperate in developing military technology, nearly six months into the Ukraine war in which his army has performed worse than expected. With its forces beaten back from Ukraine’s two biggest cities and making slow headway at heavy cost in eastern provinces, the war has so far proved an unconvincing showcase for Russia’s arms industry.”

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